GBP Rejects 1.30, EUR Looks to ECB, Trade War Optimism Returns - US Market Open
USD: With the US set to have an elongated weekend with MLK day on Monday, price action in major G10 currencies has been somewhat calmer with little short-term drivers for now. Overnight reports via WSJ stating that US Treasury Secretary Mnuchin proposes to lift import tariffs on China had boosted risk sentiment, alongside high beta currencies (AUD, NZD). However, these reports had been quickly denied. Despite this, the view that the expectation that the Trump administration and China could reach an agreement is seemingly nearer. Eyes on Chinese Vice Premier’s trip to Washington from January 30th. USD index continues to consolidate above 96.00 for now.
GBP: After the largest daily rise against the greenback in a month, GBP has pulled back heading into the weekend, with the rejection at the 1.30 handle providing an opportune moment to scale back exposure slightly. Headline risk remains elevated; however, the narrative has moved to a somewhat softer Brexit following Theresa May’s sizable meaningful vote defeat. Consequently, with no-deal Brexit risks receding and expectations building for an extension to Article 50, GBP seems cheap at current levels with dips presenting opportunities for upside. The next look at Theresa May’s revised withdrawal agreement will take place on Monday.
EUR: The Euro continues to stick within its 1.13-1.15 range with little signs of a breakout. Eurozone data persists on surprising to the downside as shown in the Citi Economic Surprise Index. Although, this has not yet rung major alarm bells for President Draghi who continued to provide an upbeat, while also acknowledging the weak data points. As such, don’t expect fireworks from next week’s ECB meeting with the Draghi and Co. likely to stick to the same narrative. Alongside this, option markets also suggest indecision for EURUSD with risk reversals almost neutral (showing slight put bias). For now, the base in EUR is set at 1.1210, a slight pick-up in data is needed for the currency to press for better levels and eye a move to 1.16.
Gold: Having rejected the $1300/oz level, the precious metal has experienced a pullback towards $1285 amid the rise in equity markets sapping safe haven flow from gold, while the pick-up in US treasury yields has also weighed. Eyes are now set on a $1280, which could open a move towards $1264 before a move to the upside. Given the deteriorating outlook for the global economy, longer term risks still favour upside for gold with a longer-term view to $1360.
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--- Written by Justin McQueen, Market Analyst
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