USD/JPY remains under pressure

On Wednesday, there were few eco data to guide currency trading. Risk sentiment improved temporary and provided some support for the dollar ahead of Fed Yellen’s testimony before the House. Yellen kept a balanced approach. She acknowledged risks to the outlook. At the same time, the Fed still expects a path of gradual rate hikes. Initially, the dollar gained ground against the euro. However, the gains evaporated soon as US equities failed to extend gains. USD/JPY dropped below 114 to close the session at 113.35 (from 115.11). EUR/USD also reversed an earlier dip to close the session at 1.1292 almost unchanged from Tuesday (1.1293).

This morning, several Asian markets return from the Lunar new year holidays. Mainland Chinese markets remain closed. Markets in Hong Kong and South Korea have some catching up to do on the recent decline in other markets.
Japanese markets are closed but the yen remains under upward pressure.
USD/JPY set an new correction low in the 112.54 area. EUR/USD is little changed hovering near the 1.13 pivot.

Today, there are again very few eco data with market moving potential in Europe and in the US. The US jobless claims are expected to decline slightly from 285 000 to 280 000. The report might have some intraday impact on currency trading, but it is no trend-setter. Fed’s Yellen will attended the second part of her hearing before Congress. Yesterday’s hearing before the house didn’t bring a high profile guidance for USD trading. So, currency traders will again have to look for clues from global markets trading.

Over the previous days, global markets showed diffuse, instable trading dynamics. Some markets (like oil) showed a temporary pause in the downtrend, but sentiment remains very fragile. The same applies for the developments in the credit markets and stress in the financial universe. It will probably take quite some time for all this markets to find a new equilibrium. At the same time, US bond yields remain on a downward trajectory. A sustained directional rebound of the dollar remains difficult in this context even as Fed’s Yellen kept the door open for further rate hikes. USD/JPY obviously is most vulnerable in this process. EUR/USD is holding within reach of the recent highs, but for now the losses of the dollar against the euro remain limited. Of course, Europe/the euro has its own issues that make it difficult for the single currency to play its role as preferred safe haven (stress in the financial sector, gradually rising tensions/spread widening in the periphery, deeply negative interest rates).
Admittedly, the drivers behind the price moves in EUR/USD weren’t always clear of late. However, we don’t see a big case for the euro to be a better safe haven than the dollar. We look out for signs of a topping out process in EUR/USD to reinstall shorts.

From a technical point of view, EUR/USD broke above the 1.1060/1.1124 resistance area (15 Dec top: 62% retracement). This is a dollar negative. The short-term correction high stands at 1.1338. Next important resistance kicks in at 1.1495.The jury is still out, but looking for a topping out process in EUR/USD. The picture for USD/JPY improved temporarily after the BoJ easing two weeks ago. However, the gains evaporated very soon. The pair even dropped below the key 115.98 pre-BOJ correction low. This a high profile warning signal. We expect the BOJ to send warning signals. However, for now there is no good reason to fight current yen strength as long as global uncertainty persists.

Sterling decline takes a breather

Yesterday’s easing of global tensions also calmed selling pressure on sterling. This rebound was again driven by global market sentiment. The UK production data disappointed. Sterling temporary lost a few ticks upon the publication of the report, but soon extended its intraday comeback as global sentiment improved. EUR/GBP touched an intraday low in the 0.7713 area but rebounded as the risk-on correction ran into resistance later in the session. The pair closed the session at 0.7775 (from 0.7803). Cable also returned north of 1.45 to set an intraday top in the 1.4578 area. However, cable lost some ground later in the session. The pair closed the session at 1.4522 (from 1.4472).

Overnight, the RICS house price balance was weaker than expected at 49%.
Later today, there are no important eco data. Sterling trading will again be driven by global factors. There are no really high profile signals this morning, but sentiment remains fragile. So, a sustained further rebound of sterling is far from evident in a daily perspective. The most recent headlines on the Brexit-negotiations also suggests some obstacles in the process. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Next big resistance stands at EUR/GBP 0.7854/75. A return below EUR/GBP 0.74 would be a first indication that sterling enters calmer waters.

•  Download Full Sunrise Market Commentary Currencies