Bank of England holds rates steady. Optimism for a smooth Brexit lifts GBPUSD from kneejerk lows.

Summary

• USDCAD: Dollar/CAD indeed wrestled with the 1.3180-90s early yesterday.  The market fell back below it briefly following some stronger than expected Canadian Building Permits data and some bullish EIA oil inventory figures, but broad USD buying into the London close (led by EURUSD and AUDUSD selling we’d argue) helped rescue USDCAD back above the level.  This set the stage for the continued technical strength we’ve witnessed since then, and we now sit in the 1.3250s which we said was possible yesterday.  March crude oil is unwinding yesterday’s post EIA rally by trading down 1% at this hour, which is USDCAD supportive.  Next up are some speeches from the Fed’s Kaplan and Clarida around the 9:15-9:30 hour.  Other than that though, we should have a rather uneventful session today when it comes to headlines.  Tomorrow brings the release of the Canadian January employment figures out tomorrow, which should provide the next major inflection point for USDCAD.  Until then, we think the market tests the next resistance level in the 1.3270s and possibly fades.

• EURUSD: Euro/dollar can’t seem to catch a break here, after yesterday’s attempt to bounce off the 1.1390-1.1400 support zone failed miserably into the London close.  The move below support yesterday afternoon inviting more selling into the NY close, which then spilled over into overnight trade as the market sought out the next major trend-line level (1.1340s).  Germany reported another awful economic number this morning (-0.4% MoM decline in Industrial Production for December vs expectations of +0.8%).  The European Commission slashed its 2019 GDP growth forecast from 1.9% to 1.3% as well today, citing particular concerns about Germany, France, and of course Italy.  These two fundamental developments were the catalysts for further EURUSD selling as Italian bonds sold off and the BTP/Bund spread blew out to +280bp.  Chart support in the 1.1340s has fallen but traders are trying to buy the dip here.  We think the 1.1340s will be today’s pivot.  Stay below and the sellers will remain in charge, but trade back above and we might see some short covering.

• GBPUSD: The Bank of England just announced its latest decision on monetary policy, and it was a unanimous 0-0-9 vote to keep interest rates unchanged and keep its asset purchase target steady at 435bln GBP (as expected).  However, the central bank revised lower its GDP and inflation forecasts for the next two years, and this was enough to see GBPUSD kneejerk lower into the 1.2850s support level (after losing prior support in the 1.2920s.).  Buyers have swooped in now at the lows however as governor Mark Carney speaks about Brexit at his press conference.  While they admit that Brexit uncertainty has “intensified”, the BoE is still playing up the optimistic mantra of “limited and gradual hikes will be needed” should Brexit proceed smoothly.  GBPUSD has shot up back above the 1.2920s as we write, and we think a bullish technical pattern may now be in the works should we close at these levels today (inverted daily hammer).  It’s being reported that Theresa May didn’t achieve any progress with European Commission President Juncker when they met today in Brussels.  Juncker reiterated that the EU will not reopen the withdrawal agreement, but is willing to work on a “political declaration” with the UK before the end of February.  The EU’s Brexit negotiator, Barnier, will meet with UK Brexit secretary, Barclay, on Monday.  Theresa’s May government is saying they are planning on tabling another Brexit motion before Parliament on Feb 14th.

• AUDUSD: The Aussie is trading on the defensive this morning following yesterday’s inability to bounce off chart support in the 0.7120s.  This level gave way amidst the broad USD buying that swept over markets into the London close and we’ve since dribbled lower to test the next support level in the 0.7090s.  EURUSD weakness is certainly not helping here in our opinion, nor are the lingering effects of yesterday’s swift, RBA-driven move down through the 0.7170s.  We think market momentum will continue to favor the sellers here in the near term.

• USDJPY: Dollar/yen indeed took another shot at the upside yesterday after the 109.60s held, but chart resistance in the low 110s capped yet again (like it did on Monday).  The S&P futures are trading in the red this morning following equity selling in Europe due to poor earnings a weak economic data out of Germany.  India’s central bank surprised markets with a rate cut, which is adding fuel to fears of a global slowdown.  USDJPY continues to hold support in the 109.60s however, and so we think we range trade here for the time being.

Tune in @EBCTradeDesk for more real-time market coverage.

Market Analysis Charts

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USD/JPY Hourly Chart

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Charts: TWS Workspace

About the Author

Erik Bregar - Director, FX Trading

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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