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by Charalambos Pissouros

USD Up After NFPs, AUD Gains on RBA Decision

The dollar continued trading somewhat higher against its major peers yesterday, perhaps as investors continued cheering Friday’s stronger than expected US employment data. US equity indices closed Monday’s session in the green, also helped by optimism over a final trade deal between China and the US. The Aussie was the G10 winner, rallying after the RBA decision. The Bank kept interest rates unchanged as was broadly expected, but the accompanying statement was not as dovish as many may have anticipated.

USD-traders Cheer Friday’s Jobs Data, Broader Sentiment Stays Supported

The dollar continued trading somewhat higher against most of the other G10 currencies. It underperformed only against AUD and NZD, while it traded virtually unchanged against CAD. The greenback gained the most versus SEK, GBP, NOK and CHF in that order.

USD performance G10 currencies

It seems that investors continued cheering Friday’s stronger than expected US employment data, which may have eased somewhat concerns with regards to the health of the US economy. Indeed, all three US equity indices closed in the green, also aided by optimism surrounding the US-China trade saga.

Digging into the details of the report, NFPs rose 304k in January, beating estimates of 165k, while December’s print was revised down to 222k, but still a solid number consistent with a tightening labor market. Average hourly earnings came in at +3.2% yoy as was expected, but December’s print was revised up to +3.3% yoy. With regards to the unemployment rate, it ticked up to 4.0% from 3.9%, but given that the participation rate rose as well, this may have been due to more people entering the labor force. 

Having said all that though, although the greenback gained in the aftermath of this report, expectations around the Fed’s future plans have not changed much. After all, the Committee signaled patience at last week’s meeting, already acknowledging the strength of the labor market. According to the Fed fund futures, market participants see only a nearly 10% chance for Fed officials to push the hiking button this year, and at the same time, they assign an equal probability to a rate cut.

Back to the equities and the broader risk appetite, apart from the upbeat US jobs report, stock indices were also boosted by Trump’s optimistic remarks with regards to the prospect of a final trade deal with China. “It looks like we are doing very well with making a deal with China”, the President said during a Sunday interview to CBS. Just after last week’s talks in Washington, Trump said he would meet with his Chinese counterpart Xi Jinping soon for finalizing a deal, and his weekend remarks may have encouraged investors to increase bets on that front. Barring any headlines suggesting otherwise, risk sentiment is likely to stay supported heading into such a meeting, as now, market participants probably see a higher likelihood for a final accord before the deadline of March 1st.

USD/JPY – Technical Outlook

USD/JPY continues to balance around its key resistance level at 110.16. Looking at the 4-hour chart, we see that USD/JPY sits on the 200 EMA and is not moving lower, which, in our view, shows that the pair might try and make another run above the 110.16 barrier towards higher resistance areas.

A push above the 110.16 hurdle could lift the rate towards the 110.70 obstacle, which is marked by the intraday swing highs of December 28th and 26th. There is a chance of seeing USD/JPY getting held there, or even correcting slightly back down. But if the bulls remain strong, the pair could easily travel back up towards the above-mentioned 110.70 obstacle, a break of which may push the rate towards the 111.10, or even the 111.45 levels.

Alternatively, from the short-term perspective, if the rate slides back below the 109.75 hurdle, which is the high of January 30th, this might spook the bulls for a while, as more bears may join in for a short slide lower. This is when we could aim for the 109.10 obstacle, which marks the lows of January 22nd and 29th. If the pair reaches that obstacle, we may see a small rebound, but if the sellers continue dictating the rules, USD/JPY might go a bit lower, to test the short-term upside support line taken from the low of January 3rd. 

USD/JPY 4-hour chart technical analysis

AUD Rallies After RBA Appears Less Dovish Than Expected

The Australian dollar was the G10 winner, gaining following the RBA interest rate decision overnight. The Bank kept interest rates unchanged at +1.50% as was widely anticipated, while in the accompanying statement, the Bank noted that its central scenario is for the Australian economy to grow by around 3% this year and a little less in 2020, which is a downside revision compared to its previous view of a 3.5% growth in 2019 and suggests a downgrade of the GDP projections in the quarterly Statement on Monetary policy, released on Friday.

Reserve Bank of Australia RBA interest rates

That said, officials remained upbeat with regards to the labor market, noting that the unemployment is expected to slide towards 4.75% over the next couple of years, and that wage growth is expected to continue picking up, albeit at a gradual pace. As far as inflation is concerned, the Bank’s central scenario is for underlying inflation to gradually rise to 2.25% in 2020, but headline inflation is expected to decline in the near term due to lower energy prices. In our view, this suggests unchanged underlying CPI estimates on Friday, and a downside revision in the headline forecasts.

With regards to the hikes in mortgage rates by several Australian banks, with the latest move coming from the National Australia Bank, policymakers acknowledged that credit conditions are now tighter than they have been, but reiterated that mortgage rates remain low, with strong competition for borrowers of high credit quality.

In our view, the statement had a somewhat dovish flavor compared to the previous one, but apparently not as dovish as many may have expected and that’s why the Aussie may have rallied. Remember that a couple of weeks ago, the currency tumbled after the NAB hiked mortgage rates by 12bps, a move representing a tightening in financial conditions, which could thereby delay even further the RBA from raising interest rates. With some participants speculating that the RBA’s next move could even be a rate cut, the not-so-worrying stance with regards to credit conditions may have prompted some investors to change their minds.

AUD-traders are now likely to shift their attention to the quarterly Statement on Monetary Policy, due out on Friday, for the Bank’s updated economic assessment, but overall, we still expect the Aussie to stay mainly driven by the broader market sentiment rather than monetary policy. Increased optimism with regards to a final accord between China and the US could well support the Aussie, due to the tight trade ties between China and Australia.

EUR/AUD – Technical Outlook

After a quick spike higher on the release of Australia’s retail sales figures, EUR/AUD tested its short-term downside resistance line, taken from the high of January 3rd. The pair then reversed 180 degrees and travelled south in the aftermath of the RBA decision, where it is now very close to its key support area at 1.5725, marked near the lows of January 31st. Given that EUR/AUD failed to make higher highs and now is moving lower, we will continue leaning more to the downside, at least for a while.

A drop below the above-mentioned support area, at 1.5725, could confirm a forthcoming lower low and the rate may slide towards the next possible support zone, at 1.5675, marked by the lows of December 11th and 13th. If the selling activity remains strong, and we see that support zone failing to withhold the rate from moving lower, this could increase the chances for the bears to drive EUR/AUD towards the 1.5585 obstacle, which might now take the role of support, because on November 30th it acted as a good resistance level.

In order to consider the upside again, we would first like to see a push above the aforementioned downside resistance line and then a break above the 1.5900 hurdle, marked by today’s high. This way, we could target slightly higher resistance levels like the 1.5995, or the 1.6035 obstacles, which were the highs of January 29th and January 24th, respectively. If the bulls remain strong, the rate may get a boost towards the 1.6155 hurdle, marked by the high of January 10th.

EUR/AUD 4-hour chart technical analysis

As for Today’s Events

During the European day, we have the final services and composite PMIs for January from several European nations and the Eurozone as a whole, as well as the bloc’s retail sales for December. As it is usually the case, the final PMIs are expected to confirm their preliminary estimates, which showed that the bloc’s composite PMI slid from 51.1 to 50.7, its lowest since July 2013. With regards to retail sales, expectations are for a 1.5% fall after a 0.6% increase in November, something that would drive the yoy rate down to +0.5% from +1.1%.

The UK service-sector index for January is also coming out and it is expected to have ticked down to 51.1 from 51.2. Both the manufacturing and construction indices for the month slid by more than anticipated, weighed on by Brexit uncertainty, something that tilts the risks surrounding the services forecast to the downside. That said, although the services PMI is the most important among the three, we don’t expect it to prove a game changer with regards to the pound’s faith. With the clock ticking towards March 29th, the official date the UK departs from the EU, and no concrete plans by UK officials on how to move forward, the British currency is likely to stay anchored to headlines surrounding the Brexit saga.

We get PMIs from the US as well. The final Markit service-sector and composite indices for January are scheduled to be released, as well as the ISM non-manufacturing index for the month. The final Markit prints are expected to confirm their preliminary numbers, while the ISM index is forecast to have slid to 57.5 from 58.0. Canada’s trade balance for December is also due out.

With regards to the energy market, we have the API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is available.

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