USD continues to challenge recent ST top

KBC Market Research Desk KBC Bank

The EUR/USD decline that reigned for the whole of last week slowed temporarily on Friday. EMU eco data were second tier and mixed. A first test of the 1.1325 area was rejected. Early in US dealings, it looked that the some end of week profit taking on EUR/USD shorts could be on the cards. However, a persistent fragile risk sentiment blocked the EUR/USD rebound. EUR/USD even returned to the week lows and closed at 1.1323. USD/JPY finished marginally lower at 109.73.

This morning, Asian indices are trading mixed with several markets reopening after Lunar New Year holidays, but Japanese markets are closed today. In thin holiday trading, USD/JPY tries another attempt to test/regain the 110 barrier. EUR/USD (1.1325 area) continued to hover near recent lows. (FX) markets are pondering the next moves in the US-China trade talks that will continue this week. In thin Asian markets, there was some kind of a brief ‘mini-flash-crash’ of the Swiss Franc this morning. EUR/CHF spiked temporary to the 1.14+ area, but soon returned to well-known territory in the 1.1325 area.

There are only second tier data in the US and Europe. So, global risk sentiment, influenced by headlines on the China-US trade talks, on global growth and on a potential new US government shutdown, will set the tone for FX trading. The trade-weighted dollar is still testing the 96.67 neck-line/resistance, but a clean break didn’t occur yet. Still it looks that the dollar retains the benefit of the doubt as long as the pending event risks continue to weigh on markets. Over the previous 10 days, EUR/USD was captured in a gradual, but protracted downtrend as disappointing EMU data outweighed the late January soft U-turn of the Fed. The day-to-day momentum is USD supportive & euro-cautious. EUR/USD 1.1290/67 is next support ahead of the 1.1218 Nov low. After recent news/decline, quite some euro negative news should be discounted. That said, for now there is no trigger in sight to reverse the USD-positive/euro negative momentum.

EUR/GBP was locked in a narrow range in the mid 0.87 area Friday. The positive impact of Thursday’s BoE statement was worked out and there was no new Brexit news. Today, UK Q4 GDP and December production data are interesting, but the focus is on the UK-EU Brexit talks. A potential new vote in the UK Parliament on Thursday is the next point of reference for sterling trading. For now, we assume more technical trading around current levels.

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KBC Market Research Desk

KBC Bank

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