USD/JPY under pressure, but no break yet

On Thursday, EUR/USD and USD/JPY initially traded sideways. There were no important eco data and as equities entered calmer waters. The ECB press conference was the game-changer for global trading. ECB’s Draghi hinted to the possibility of further easing in March. The euro nosedived. EUR/USD dropped briefly below 1.08 but rebounded as the gains on US equity markets remained moderate. EUR/USD closed the session at 1.0874 (from 1.0890 on Wednesday). USD/JPY hovered up and down but finally succeeded a nice rebound, closing the session at 117.70 (from 116.94).

This morning, Asian equities show decent gains with Japan outperforming (gains over 5%+). In the wake of yesterday’s ECB press conference, investors apparently embrace the idea that major central bankers might still take action to ease global tensions if necessary. This is a forceful enough trigger for a countermove after recent sell-off. The rebound in the oil price is a positive, too. The PBOC again set the fixing of the yuan against the dollar little changed. The off-shore yuan trades little changed. The HKD rebounded sharply and trades currently at 7.7975. Commodity currencies are also in very good shape.
AUD/USD trades again north of 0.70. USD/CAD dropped below 1.43. Yesterday afternoon, it was not clear that the dollar would be able to maintain its post-ECB gains. However, this morning the dollar is holding strong. EUR/USD trades in the 1.0825 area. USD/JPY trades north of 118. The yen is weakening as markets see a rising chance from more BOJ easing, maybe already at next week’s meeting. The dollar also received interest rate support as US yields rose, probably due to a higher oil price.

Today, the eco calendar contains the first estimate of the eurozone PMI’s for January, the US Markit manufacturing PMI and US existing home sales. The consensus is looking for a limited drop in the composite PMI from 54.3 to 54.1. For both the manufacturing and services PMI, we believe that the risks are for a downward surprise as global growth concerns might have weighed on sentiment. A disappointing figure might cement market expectations for additional ECB easing. This might be a slightly negative for the euro.

The US data will probably only have a limited impact on USD trading. Of course, global factors will also do their job. At this stage it looks that the rebound of oil might have some further to go. US and European equity futures are also in positive territory. So, the dollar might get additional interest rate support. So, the topside in EUR/USD looks well protected. We are a bit more cautious on the upside potential in USD/JPY as we think that a substantial further easing of the BOJ is no done thing yet.

From a technical point of view, EUR/USD failed to regain important resistances at 1.1087 (breakdown) and 1.1124 (62% retracement from the October high).
Two weeks ago, EUR/USD failed also to sustain below 1.0796 support (07 Dec low). This area was again tested yesterday. Next support is at 1.0711/1.0650 (correction low/76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.0985/1.1004 (reaction top) is a first reference. This level was left intact even as sentiment was outright risk-off over the previous days. Next resistance comes in at 1.1060/1.1124 (15 Dec top/62% retracement). We expect this resistance to be strong and difficult to break. After the ECB announcement, we look to sell EUR/USD on upticks for return action lower in the range. The picture for USD/JPY remains negative below 120, but the pair tries to build a bottom. Still, we think that a sustained return above 120 will be difficult.

Sterling rebounds

On Thursday, sterling was under slight pressure during the European morning session. EUR/GBP came within reach of the recent high (0.7755), but a break didn’t occur. The Brexit debate was also on the radar as UK PM Cameron spoke in Davos. In the meantime, cable touched a new cycle low below 1.41.
In the afternoon, the soft ECB comments pushed EUR/GBP sharply lower. The pair closed the session at 0.7647 (from 0.7674) area. Cable rebounded too, at least partially supported by a rebound in the ail price. The pair ended the day at 1.4221 (from 1.4191).

Today, the UK December retail sales will be published. A limited setback after an extremely strong November report is expected. (-0.3% M/M, 4.4% Y/Y). We see slight downside risks to the consensus.

The global context will also be important for sterling. A further rebound in oil and a (temporary?) improvement in global sentiment on risk might ease the pressure on sterling and oven trigger some kind of a short-squeeze. So, in day-to-day perspective sterling might regain some further ground. In a longer-term perspective, it’s much too early to conclude that the headwinds are over.

In a longer term perspective, uncertainty on Brexit and global negative risk sentiment are important drivers for sterling weakness. As long as these issues aren’t solved, a sustained sterling rebound is unlikely. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Next resistance stands at 0.7875. A return below 0.74 would be a first indication that sterling might enter calmer waters.

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