USD softness confounds after hawkish Fed and strong US data

Nervousness over Trump policy/disposition detracts. GBP also resilient as economic stats turn sour, while EUR, but more so JPY wins out.

Next week starts off on a quiet note, with the US observing the President’s day holiday on Monday. Canada is also off for Family day. The main data theme will be the manufacturing and services PMIs, where both the EU and US report their respective numbers on Tuesday. We will also have the German IFO survey on Wednesday, followed by the UK Q4 GDP stats a little later in the morning session, but both of these releases could be eclipsed by the FOMC meeting minutes out post London close. German GDP is on Thursday, while Canadian CPI is stand out for Friday.

We will also have the usual mix of Fed speakers, but despite this and the above data releases, we expect investor nervousness over Trump policy will continue to dictate sentiment away from the fundamental backdrop. The past week has been clear evidence of this, with Fed Chair Yellen’s testimony alluding to a series of rate hikes through 2017, and putting March firmly on the table for the first move. Adding to this has been some US strong data backing up the hawkish tone at the Fed, but USD buying was swiftly reversed on each occasion, with USD/JPY losses leading the way. Reports of selling out of China alongside profit taking in equities hitting UST yields were cited as key drivers of the USD pull-back, but another uncomfortable press conference by president Trump highlights the uncertainty permeating through the market – and with Wall Street still pushing for new record highs.Thursday’s North American session produced the first wobble, but the Dow once again managed to shake off the early jitters to record another all-time high.

For USD/JPY specifically, the recent base in the 112.50-111.70 range is now looking vulnerable, and if global stocks take a hit that many have been predicting – for some time, it has to be said - then we could see a significant shift back into the JPY right across the board.

Volumes in EUR/JPY and GBP/JPY have been picking up, and Friday’s pre UK retail sales trade saw the latter selling off aggressively, gathering momentum as the weak numbers pushed Cable briefly below 1.2400, while EUR/GBP tested to within 10 ticks of the 0.8600 level. GBP/JPY dropped below 140.00, before support in the 139.50-138.90 area kicked in.

The EUR in the meantime continues to hold up well in the face of the potentially disruptive elections in Holland and France. The ECB have been unequivocal in their continued narrative that policy will remain accommodative as long as core inflation remains subdued. EUR/USD based out ahead of 1.0500 in the early part of the week, and despite holding off 1.0700, finds support above 1.0600 which is fast developing as a near term value point.

More vulnerable in the near term are the commodity linked currencies, which have fared well during the USD rally. Much of this has been based on the demand for base metals in China, to the benefit of the AUD in particular, while NZD has been coat-tailing its Antipodean counterpart, but now lagging since the RBNZ statement citing exchange rate levels threatening growth sustainability. AUD/NZD has seen some decent upside accordingly, but after some sharp moves seen over the past week or so, profit taking and or exhaustion should see some consolidation close to 1.0700 in the near term.

The CAD has been ushered out of the limelight in recent weeks, but supportive has been the latest series of domestic employment data alongside buoyant Oil prices, but the broader risk sentiment has also played a part in holding CAD on an even keel, with longer term interest factoring in the spillover effect from US growth.