Taking equity performance as a broader gauge of overall market sentiment we see that initial negative sentiment at the start of the week improved on Tuesday. The overriding themes in the market were the softer US data and the turmoil in Ukraine. Markets discounted the softer US data concerns and blamed it on the weather, while in the Ukraine the situation somewhat improved after the former President Yanukovych fled out of Kiev.

This week we had some noteworthy data for the EZ as well, the euro suffered close to a 50-pip blow with inflation in the eurozone contracting by -1.1 per cent throughout the month of January, while for the year-on-year equivalent inflation only nudged marginally higher to 0.8 per cent.

In the US, inflation eased on a month-to-month basis but was only mildly higher than the previous reading, well in line with expectations. Towards the end of last week, the Fed released the minutes of its last meeting and while no materially different message was released, overall the communication was interpreted as leaning mostly towards the hawkish side; with a couple of Fed members arguing in favour of a rate hike being sooner rather than later.

The EUR/USD evolution has remained fairly steady overall, with daily trading held just a notch below recent highs of 1.3818, seen at the end of last year – at the time of writing the pair is at 1.3748. The euro has shown resilience so far even after concerns of disinflationary pressures in the EZ continued to be manifested in Monday’s inflation numbers. The USD has somewhat slowed down its advance on the softer data. The US Dollar Index is at the lower side of the trading range so far seen this year, trading at 80.08 at the time of writing.

Next week’s communication after the ECB’s two-day policy meeting will certainly create headwinds for the single currency – keep an eye on this event.

The Japanese yen enjoyed support early into the current week gaining +0.14 per cent according to the Bloomberg Correlation-Weighted Currency Index (BCWI). A recently renewed interest for the yen is being attributed to speculation that the Chinese authorities want a yuan decline, before a possible widening of the trading band and this is creating safe haven demand for the yen.

So far this year the yen recovered +3.15 per cent according to the same index. The yen soothes some of the losses it has suffered over the past year and is still suffering -10.56 per cent on the BCWI. Losses that were triggered by the BoJ’s aggressive easing stance.

USD/JPY, currently trading at 102.28, has performed rather unimpressively throughout the course of the current month, barely managing a 0.12 per cent rise and has stuck in the range of 100.75-102.82.

The British pound retains its title of the best performer amongst the major currencies. The British pound is up 0.83 per cent since the beginning of the current year but flaunts an overall +12.28 per cent in the past year, according to the BCWI.

EUR/GBP price action has been a gradual move lower in the past six months, where the EUR/GBP has slipped from highs of 0.8769 in August 2013 to 0.8157 in the current month. The trend is expected to continue as the respective central banks and hence the interest rate differentials between the two currencies continue to move further apart.

In the current week EUR/GBP is initially expected to test 0.8359 area, to then sell off to 0.8189-0.8121. Resistance at 0.8294-0.8331, Support at 0.8189-0.8121.

As unemployment rate in the UK has continued to register an improvement and GDP growth was slowly picking up, speculators drove the GBP higher as they priced in a sooner rate hike. Earlier this month, however, at the World Economic Forum, Governor Carney dampened some of the expectation of the imminent move when he said that the recovery still had some time to run before it would be appropriate for the BoE to move away from its current monetary setting.

This raised a lot of criticism about the scope of forward guidance but nevertheless does not really change the fundamentals behind the currency pair and may only affect the timing of it.

GBP/USD is slowly recovering some of the losses seen last week after it bounced off 4-year highs at 1.6822. For the current week we envisage a possible rise to 1.6730 - 1.6769; Resistance at 1.6769 - 1.6901, Support at 1.6481 - 1.6559.

Upcoming FX key events:
Today: Swiss Q4 GDP, German unemployment rate and CPI, US durable goods orders;
Tomorrow: US annualised GDP, EZ unemployment and Canadian GDP.

Technical key points:
EUR/USD is neutral. EUR/GBP is bearish, target 0.8050, key reversal point 0.8400. USD/JPY is neutral. GBP/USD is bullish, target 1.6900, key reversal point 1.6250. USD/CHF is neutral. AUD/USD is neutral. NZD/USD is neutral.

Please feel free to send any comments or feedback regarding our articles on trading@rtfx.com.

Visit RTFX for additional forex news and demo trading account information.

RTFX Ltd is licensed to conduct investment services business by the MFSA. This information does not constitute advice, should not be relied on as such to enter into a transaction or for any investment decision and is provided for information purposes only.

www.rtfx.com

Rudolf Muscat is a senior trader at RTFX Ltd.

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