Wednesday saw the dust settle somewhat following Tuesday’s burst of volatility. GBP gave back some of its gains following its surge post PM May’s Brexit plan, if you can call it that, while the USD also managed to recoup most of its Tuesday losses as well, the greenback had clawed back some ground through much of the day before Janet Yellen gave it a final leg higher with some hawkish commentary later in the evening. The USD, although firmer, did not rally like we’ve seen in the past on such comments, perhaps the market is growing weary of this rhetoric, or perhaps most are now in wait and see mode as we await Donald Trump’s inauguration on Friday, and hopefully some clarity on his “huge huge” Fiscal plans. Risk sentiment found itself better supported through much of the day although gains were limited to small advances across Europe, while in the US it was a similar story with stocks the S&P and NASDAQ showing very slight gains while the Dow and NYSE were just about lower. Overnight JPY lost ground and Japanese stocks advanced, while Chinese markets traded lower.
The rebound in the USD yesterday came following 5 days of consecutive selling in the greenback and despite Yellen’s Hawkish comments last night, the USD still looks exposed as it trades just 2.5% off recent 14 year high levels. The fact is the USD index still sits within those higher ranges and aside from the recent highs posted, we have not been in this territory in 14 years. We have been highlighting two topics for several months, the first is that the US economy needs to see perfection for the Fed to have scope for higher rates, and the second is that Donald Trump was actively vocal against the stronger dollar throughout his campaign. Given these two scenarios we feel the USD is at risk at these higher levels, and even through the Fed President Janet Yellen suggested most colleagues expected “a few” rate hikes this year, it would be dependent on the economy’s ability to absorb shocks and also the strength upcoming data. The Fed’s beige book of economic sentiment showed the economy was expanding at a moderate pace, but is that sufficient to raise rates above 1% by year end? We’ll have to wait and see and this weekend could provide the colour we need, while today we’ll be looking towards jobless claims and housing data.
The big event of the day comes from the ECB, although markets expect little to have changed since they expanded their policy in December and no change is expected today. European data has been steady, inflation indicators remain steady and the previous extension of QE, albeit at lower volumes still stands. Markets will be looking for indications of Taper talk once again, many called last month’s action tapering which makes no sense as they extended their QE program, they didn’t pair it back. The press conference will be key here and should tapering be discussed then the single currency will have some scope to rally, but it is unlikely the ECB will be looking to rock the boat so soon, especially given the risk seen around Article 50 and Brexit, as well as Donald Trump’s presidency which will occupy concerns through the rest of Q1. EURUSD will be looking to break resistance above 1.0720 if it’s to look for progression towards major resistance around 1.0880. To the downside 1.0580 and 1.0520 provide some interesting levels for buyers, anything below there turns EURUSD very bearish. EURGBP will find support around Tuesday lows at .8624, while .8590 area below is confluence of moving averages and will likely offer additional support. Any move above .8700 will likely find sellers.