FX Moves Higher Amid Quiet US Market
EUR / USD - Technical Resistance Level Is Capping the Upside
EUR/USD struggled to break above the key 1.0500 level yesterday, continuing to mirror US dollar moves, despite a move from Europe to boost defence spending in the context of security needs. There is still a lack of clarity regarding the final result, as Germany's leaders are likely to wait until after the election on February 23rd to make a decision. This uncertainty has intensified expectations for rising government expenditure in the defence sector, which is being reflected in higher yields on the longer end of the curve despite no concrete statements having been made regarding joint bonds. This, alongside a quieter American market due to the holidays, kept the near-term momentum cautiously optimistic.
However, the longer-term narrative continues to weigh on the pair as the ECB's dovish stance points to further rate cuts in 2025, which could cap the pair's upside potential. The technical analysis highlights resistance levels at 1.0533 and 1.0551, representing late January highs and key Fibonacci retracement levels, while strong buying interest below 1.04 indicates robust support in the 1.0375-1.0385 range.
The immediate outlook remains cautiously optimistic, with potential for moderate gains back to retest the key 1.0500 level. A decisive break above it could trigger gains to 1.0600, which is another robust level on the upside.
USD / JPY – Economic Data Supports Further BOJ Rate Hikes
USD/JPY weakened yesterday, driven primarily by Japan's unexpectedly strong Q4 GDP growth of 0.7% against the forecasted 0.3%. This economic outperformance has strengthened market expectations for BOJ's policy normalisation, contributing to yen appreciation. The forward swaps markets are currently pricing in 38bps worth of hikes from the BOJ by the end of the year.
Technical analysis reveals crucial support levels around 151.45-151.40, with the psychological 150.00 mark serving as a key target. While the 100 DMA at 152.70 traditionally acts as a psychological barrier for prices to breach, recent moves suggest that a 50 DMA at 155.36 is a more robust resistance in the meantime.
A combination of both technical and macroeconomic indicators points to further weakness in the pair today, but the support at 150.00 is key, limiting strong downside pressures.
GBP / USD – Markets Expect Inflationary Pressures to Remain Persistent
GBP/USD breached a psychological resistance level of 1.2600 yesterday, marking an 8-week high, with momentum supported by both macroeconomic and geopolitical developments. Alongside Europe, the UK Prime Minister Keir Starmer urged President Donald Trump to offer security guarantees. Moreover, investors are now looking ahead to the UK's inflation data release on Wednesday, which is expected to show a rise in price pressures, with headline inflation projected to rise to 2.8% YoY. Market participants are now pricing in approximately 57bps of additional rate cuts for 2025, down from 65bps at the same time last week. This risk-on momentum continued during the day despite the BOE's Governor Andrew Bailey's comment that the economy remains static, weakening the growth optimism that followed surprising 0.1% Q4 2024 growth figures last week.
Technical analysis suggests a continuation of bullish momentum, while significant resistance awaits at 1.2673 – a 100 DMA. We expect the pair to hold above the 1.2600 level in the meantime as it approaches the new resistance.
Economic Calendar
