Euro seen extending recovery

EUR/USD is expected to extend the recovery as strong US data and hawkish Fed talk failed to support the USD. The Michigan sentiment on Friday capped a week of generally solid U.S. economic data. However, the limited extent of gains indicates that market players have already factored in good US news, for now. The Michigan Confidence reading of 98 (versus an expected meagre improvement from 91.7 to 92.2) gave the dollar a modest boost, even despite the rise in the 12m inflation forecast component from 2.9% to 3%. A barrage of hawkish Fedspeak was also absorbed with surprising market implacability. Fed hawk Lacker highlighted the risk that core inflation may rise and does not subside as the main risk to the US economy. Lacker meanwhile remained sanguine on

growth, holding that the yield curve’s inversion is not a recessionary signal. Additionally, Fed’s Hoenig pointed out that current rates would be able to prevent inflation from moving higher and that more “assurances” were needed on inflation and its (un)sustainability before “we can begin to talk about other choices that might be out there”, namely rate cuts. An additional element potentially mitigating EURUSD downside was commentary from the ECB’s Garganas, who pointed out that ‘monetary policy is still very accommodative” and acknowledged the 100% chance of a March hike priced by markets, BNP Paribas reported in its Monday investment report.

The Financial Mirror technical charts suggest that a break above $1.3055 would open the way for a massive euro rally to 1.3245 area as a minimum.

CFTC data signalled a record high in speculative net short positions in the JPY. For the week ending 16th January, net shorts rose to 138k from 123k the prior week, according to the BNP Paribas report. Note that this was before the BoJ decision which means that new data on speculative positions should show another fresh high. Typically this would imply that caution is required with trading the JPY on the short side, but we see little in the way

this week to test the view of carry trades and hence investors are unlikely to be significantly perturbed by this build up in positions. Hence we expect the JPY to stay the underperformer.

Both the JPY and CHF are seen as funding currencies.

Sterling meanwhile gained further support from the stronger than anticipated UK retails sales data which rose 1.1% in December against consensus forecasts for a 0.6% rise, taking the year on year rate up to 3.7% in December from 3.1% y/y in November. The UK BSA mortgage approval figures for December rose to 5,418 from 4.944. It is also

interesting to note that initial survey evidence for UK wage settlements have seen an increase, which should keep rate expectations elevated. The IRS survey of January pay deals pointed to a rise of 3.6% y/y compared to 3.0% y/y in December. This morning, Rightmove house prices rose 0.5% m/m in January allowing annual prices to accelerate

from 13.0% to 13.5%. The acceleration comes amidst a surprise rate hike, signalling the strength of the housing sector. This week the focus will be on the BoE’s minutes and

a hawkish reading is expected according to BNP Paribas, which will increase speculation for a further rate hike possibly as early as the February meeting. GBP/USD is expected test the 1.9780 recent high putting the focus on the 1.9845 peak seen at the beginning of December. A break above $1.9810 and 1.9845 will open the way for a minimum test of 2.0055. GBP/JPY is also approaching major resistance at the 240.85 peak seen in 1998.