FX Gains Capped as Fed’s Hawkish Stance Offsets USD Weakness
EUR / USD - Approaching a New Resistance Level
EURUSD continued to gain momentum on Friday, testing the 1.0514 resistance level, driven by a weaker dollar. However, the gains in the euro were not proportional to protracted losses of the US dollar, mainly due to the long-term challenges posed by the Eurozone's relative underperformance compared to the US. This dynamic is maintaining the yield differential between the ECB and the Fed for 2025, which continues to weigh on the long-term outlook for the currency pair.
Last week, the Trump administration made several significant announcements regarding metals imports, specifically steel and aluminium, as well as plans to address automobile imports. However, we believe that markets have become somewhat desensitised to these announcements. The lack of clarity regarding the actual impact on economic performance has led to a discounting of the strong protectionist narrative from the US. As a result, the dollar weakened, with the index falling below the 107.0 level, marking a December low.
While we believe that a US dollar correction was overdue, we do not anticipate the index to experience a trend reversal on the downside. The strength of US economic and monetary policy should continue to weigh on EUR/USD prospects.
With technical indicators suggesting that the pair is currently overbought, markets could struggle to break through the resistance levels of 1.0514 and 1.0533 in the meantime.
USD / JPY - Range-Bound as Support and Resistance Hold
USD/JPY weakened slightly on Friday due to a sell-off of the US dollar. However, the momentum was not strong enough to breach the 152.20 support level, leading to limited volatility throughout the day.
Recent Japanese data, particularly producer prices and wage growth data, have strengthened market expectations for a second BOJ rate hike in 2025, helping to maintain the resistance at the 155.00 level from a longer-term perspective. The anticipated rise in Japanese core inflation, combined with forecasted GDP growth of 0.3% QoQ in Q4 2024, could further solidify the case for monetary policy tightening.
Technical analysis shows mixed signals, with the pair trading between the 150.00 and 155.00 levels. Immediate support stands at 150.93, and a test of this level could prompt a short-term reversal, especially as stochastics are approaching the oversold territory once again.
GBP / USD - Longer-Term Fundamentals Cap the Upside
GBP/USD edged higher on Friday, testing a key resistance level of 1.26, but ultimately rejected prices above this level and settled slightly below it. While markets are awaiting further updates regarding Donald Trump’s proposed reciprocal tariffs, investors have become more desensitised to these announcements. We expect this lack of clarity to continue until the March-April period when these tariffs are scheduled to take effect. As a result, there is a cautious sentiment prevailing in GBP/USD, which is capping strong upside potential despite the weakness of the US dollar. Though the delayed tariff implementation may provide some near-term relief, we believe there is continued pressure on sterling.
The resistance level at 1.2600 remains strong, supported by the overbought sentiment at these levels from the technical analysis. With no significant economic announcements scheduled from either side today, the pair is likely to be influenced by technical indicators.
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