Weekly EURUSD, GBPUSD, USDJPY Forex Analysis January 18 - January 22, 2021
US Dollar Fundamental Outlook: USD Correction Finally Unfolds Helped by Rising Treasury Yields; Biden’s Inauguration in Focus This Week
Much as we suspected, the USD extended the rebound last week and the dollar index (DXY) is now standing close to one-month highs. Aside from position squaring, another factor that has lent a hand is the rise in US yields. Several Fed Presidents recently talked about how and when tapering of QE purchases could happen. Although no one said tapering is coming any time soon, it seems markets are not ready even for a conversation about ending stimulus. But, we shouldn’t get carried away too much. While the dollar bounce is likely to extend near-term, with a President Biden at the helm, the medium to long-term bearish USD trend is likely to remain intact.
Biden’s inauguration is taking place on Wednesday and should go down quietly in the markets, unless Trump has some more surprises in store for this event (some fear such a scenario also after what we saw at the Capitol on January 6). Perhaps a more interesting event could be the confirmation hearings of new Treasury secretary Janet Yellen, who may talk about the Biden administration’s dollar policy and what she thinks about exchange rate manipulations and currency wars.
Other than the political events, the USD calendar is relatively light for the week ahead. More scaling back of short USD positions, as well as developments in other countries and technical breakouts, can fuel this dollar correction further higher this week.
Euro Fundamental Outlook: Busy Calendar This Week, as EUR Rally Takes a Turn South
The EUR could be in for volatile trading as the political and economic calendar is rather busy this week. Of the scheduled economic data, there are the German ZEW sentiment indicators due on Tuesday, CPI inflation on Wednesday, and preliminary (flash) reports of the services and manufacturing PMIs on Friday. These will show how the EU economy has fared the most recent lockdowns, so some negative surprises could spur further downside correction in EUR pairs.
The ECB also meets this week, but no big market reaction is expected around the event as Lagarde, and her crew will keep policy unchanged. However, some discussion of the EUR exchange rate during the Q&A session of the presser may induce some volatility.
To make the week even more interesting, Europe’s political calendar is also quite busy. CDU, the largest political party in Germany, elected Armin Laschet as the new leader over the weekend, and he is expected to eventually succeed Angela Merkel as chancellor later this year. In addition, Italian politics are in turmoil again, with Prime Minister Conte now facing a confidence vote in Parliament this week. If he losses, the ruling majority will collapse, and Italy may be thrown into another political crisis.
Given the above, it’s no wonder that traders have started to reduce their EUR longs. With the sentiment now having shifted, this trend is likely to continue, and further near-term losses for the euro are on the cards.
EURUSD Technical Outlook:
The daily chart gives a more detailed view into the recent EURUSD correction lower. We can see how the price broke some technical levels and trendline support and has now started a downside move from the highs.
The price is now nearing the 1.20 support zone, where also the 55-day moving average currently sits. Some reaction or bounce is likely at this stage, though the pace of the decline suggests the correction can go deeper than 1.20. The 100-day moving average (orange) and technicals on the weekly chart suggest 1.19 could be the area that EURUSD will soon reach before this correction stops.
To the upside, there is no clear, strong resistance nearby, but the 1.22 zone needs to hold to keep the corrective move intact. Moderate resistance exists at 1.21 and a stronger zone at 1.2150.
British Pound Fundamental Outlook: Now That Brexit Is Gone, It’s All About the New Coronavirus Strain for GBP
The UK is still plagued by the new, more infectious strain of the coronavirus, which has prompted the government to impose the most stringent, tier 4 lockdowns across the country until mid-February. Naturally, that is a drag on pound sterling, despite the UK being the world’s leader in vaccine distributions.
However, if the lockdown measures work and the number of daily new infections start to decline, GBP may receive some more support as markets will start focusing on the fact that the UK will probably be the first country to beat the COVID-19 virus with vaccines.
The GBP calendar features CPI inflation data on Wednesday and retail sales on Friday. BOE Governor Bailey will also speak on two occasions, and traders will pay attention to any mention of negative interest. But, his comments last week when he said that there are a lot of issues with implementing negative rates in the UK were encouraging for GBP bulls and the currency strengthened after.
Overall, the GBP outlook is moderately bullish, with only the still very high number of daily new infections being the main drag. Once that is under control, GBP may get the green light to rally more strongly.
GBPUSD Technical Outlook:
GBPUSD continues to dance on the middle trendline of the ascending channel that connects back to the March-April 2020. Since November, GBPUSD has spent more time trading near or around this trendline than at any other technical level or formation. But, the bulls simply can’t break this rising trendline, though higher highs are achieved almost on every attempt.
The red area on the chart marks the 1.33 - 1.35 zone, which is an important technical zone on the weekly and monthly charts. The price now being above this former resistance area is another bullish factor for GBPUSD in this situation. Thus, the risks around this mid-channel trendline remain to the upside, with potential for GBPUSD to reach the upper end of the channel in the 1.42-1.43 area.
Japanese Yen Fundamental Outlook: JPY Follows Dollar Higher While USDJPY Stays Stuck in a Range
The Japanese yen continued to follow the US dollar direction last week and strengthened versus most of the major currencies. USDJPY was stuck in an 80-pips range for the whole week and closed exactly where it opened. Essentially, USDJPY is acting like the yen is pegged to the dollar here, and it’s hard to say for how long this sideways range will persist.
Longer-term, however, in a broad risk-on environment as is widely expected for this year, the JPY should be an underperformer in the currency space. That trend will be more evident versus high-beta risk-sensitive currencies such as AUD, NZD, CAD, and emerging market currencies.
The Bank of Japan meets this week, but as usual, they will likely keep policy unchanged with little immediate impact on the yen and Fx volatility.
USDJPY Technical Outlook:
USDJPY is not moving much after it was rejected at the 7-month trendline’ s resistance around 104.40. With the sideways mood firmly intact here, USDJPY may have more days to spend in ranges.
To the upside, the resistance trendline remains the main hurdle to unlock a stronger bullish move. The 55-day (blue) and 100-day (orange) are almost perfectly tracking this trendline, strengthening the resistance in this area. In this situation, it makes sense to view the resistance here as a band, and currently that is the 60-pips area between 104.00 and 104.60.
To the downside, the nearest resistance is at the 103.50, where several bearish attempts were already rejected over the past two months.
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