EUR, GBP in demand versus the unloved US dollar

The majority of the G10 currencies gave back gains versus the greenback in Asia, yet the downside pressures on the US dollar will likely remain along with the possibility of a government shutdown by this week's end. An extension in the deadline to February 16 appears to be a more plausible solution, as it would give more time to Republicans for finding a compromise regarding the major government spending policies. But there are significant disparities among the policymakers. The US dollar index could find it difficult to move away from the 90 level in the absence of concrete positive news. Hence, the dollar's major counterparts could see a limited pullback in the coming sessions. The 88.295, the 200-month moving average, is the next critical support below the 90-level, as traders' attention moves to the hawkish shift from the European and Japanese policymakers.

The euro remains well bid of course against the unloved US dollar. The euro-bulls are in charge on the back of the hawkish European Central Bank (ECB) meeting minutes in December and the German coalition deal. News that the ECB's Governing Council member Hansson said that the bond purchases could stop after September is another piece of interesting information for those seeking hints regarding the future of the ECB's monetary policy. It is important to keep in mind that President Mario Draghi has often repeated that the Eurozone interest rates would stay low for quite a long time after the end of the Quantitative Easing (QE). Yet, there is a rising belief in the market that the ECB could act on its rates earlier than thought and priced in. For now, the euro appears to be in a strong positive trend and could extend gains beyond the 1.23 level before a mid-term reversal kicks in. The key supports stand at 1.2092 (December resistance turn into support) and 1.2012, the 38.2% retracement on the November – January rise.

The USDJPY extended losses to 110.33 on Monday's session. Although the US yields stand near the year-high levels, the appetite for the US dollar is clearly not there to prevent the US dollar from slipping below the 110.00 level against the yen. The 110-support could be tested on the downside, but the JPY-bulls should remain vigilant to sudden corrections as many think that Bank of Japan (BoJ) Governor Kuroda's comments may have been overly interpreted. Hence, traders seeking a correction would be tempted to buy cheap US dollars at 110.50/110.00 area. According to the most recent Bloomberg survey, the USDJPY is expected to recover past 111.00 on a weekly horizon and the pair could reach the 111.80 within a month. Offers are eyed at 111.72, currently at 200-day moving average.

The UK will release the December inflation figures today. According to analyst estimates, the headline inflation may have slowed to 3.0% year-on-year from 3.1% printed a month earlier despite the holiday season. The core inflation may have eased to 2.6% from 2.7%. A softer inflation is partly a result of a stronger pound and further pound appreciation could mark the beginning of a normalisation in consumer prices after the Brexit boost. The pound outperformed its G10 counterparts against the US dollar in Asia, as Cable made a second day attempt above the 1.38 mark; the pair is trading at the highest levels since June 2016. Trend and momentum indicators remain comfortably positive with a mid-term target set at 1.40 level.

Finally, the Turkish lira cleared the 3.80 offers amid the aggressive sell-off after Turkish President Recep Tayyip Erdogan accused the US of establishing an ‘army of terror' at its border. The geopolitical risks are again on TRY-traders' menu despite a single digit inflation target of 9.55% for the year-end in the most recent central bank survey. Although the recent improvement in inflation brought forward the possibility of a dovish rate action from the Central Bank of Turkey (CBT), the lira traders are certainly not ready for a lower pay-off on their lira holdings as the political and geopolitical risks remain significantly high for the lira denominated assets. On the other hand, the lira weakness didn't have a positive impact on Turkey's trade balance, according to Turkish Deputy Prime Minister Mehmet Simsek. Likewise, the current account deficit came in at $4.20bn in November compared with - $3.74bn printed a month earlier. This was significantly higher than the analyst forecasts. Under the current circumstances, the Central Bank of Turkey will likely choose to stay pat on Thursday's meeting.