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The U.S. dollar continued to trade weak with the euro and the Japanese yen held onto it’s gains. Investors bid up the euro and the yen as both the currency's central bank meetings are coming up next week. Hopes of policy normalization from the respective central banks have managed to keep the bullish momentum going.

On the economic front the UK's inflation data released yesterday showed a 3.0% increase in headline CPI. This was in line with expectations and slightly slower than 3.1% increase seen in November. Core CPI was seen rising 2.5%, down from 2.7% increase registered in November.

Looking ahead, the markets will be watching the BoC's monetary policy meeting today. The central bank is widely expected to hike interest rates by 25 basis points at today's meeting.

Earlier in the day, the eurozone final inflation figures will be coming out. Economists expect that consumer rose 1.4% on the headline and 0.9% on the core.

Sunrise Market Commentary

• Rates: More consolidation near sell-off lows?
  Today's eco calendar probably won't shift trading dynamics in a profound way. German and US yields remain close to, but below, key resistance levels. In Europe, we don't expect a break ahead of the SPD party convention this weekend and the ECB meeting next week. Cautiousness in the US might be warranted with a potential government shutdown looming.
• Currencies: Dollar holds close to recent lows. Decline to slow?
  The trends of a stronger euro/decline of the dollar slowed yesterday, but there was no clear sign of a trend reversal. The dollar touched new ST lows against most other majors this morning, but rebounded later. A tentative sign that the recent USD decline has gone far enough?

The Sunrise Headlines

• US stock markets ended 0.3% to 0.5% lower with Dow Jones (flat) outperforming. Most Asian stock markets record similar losses overnight.
• The ECB must keep an eye on the euro exchange rate because of the downward pressure it puts on inflation, governing council member Villeroy de Galhau said.
• In several Chinese megacities, home sales have stalled and prices have dropped. Demand has dried up in as a result of measures like higher mortgage rates, higher down-payment requirements and limits on buying a 2nd or 3rd home.
• German Bundesbank president Weidmann said that analysts' expectations that ECB interest rates won't rise before the middle of next year are reasonable.
• US Senators worked to salvage a bipartisan plan to protect 'Dreamers'—young undocumented immigrants brought to the US by their parents—as the divide grew over an immigration deal key to avoiding a government shutdown.
• Czech prime minister Babis has failed in his first attempt to win parliamentary backing for his minority government, prolonging a period of political uncertainty in one of Europe's fastest-growing economies.
• Today's eco calendar contains UK December industrial production and final EMU CPI. The BoC is expected to hike rates from 1% to 1.25%. Germany taps the market and ECB Nowotny, Fed Mestern, Evans and Kaplan speak. The Fed releases its Beige Book. Goldman, BoA and Alcoa bring Q4 earnings

Currencies: Dollar Holds Close To Recent Lows. Decline To Slow?

Dollar holds near correction lows

The trends of euro strength and USD weakness slowed yesterday, but there was no real trend reversal yet. The euro declined on growing opposition within the German SPD to start formal coalition talks and on headlines that the ECB won't change guidance at next week's meeting. Later in US dealings, the USD struggled again as stocks corrected off record levels. US long term yields eased and the dollar reversed most intraday gains. EUR/USD closed little changed at 1.2260. USD/JPY finished slightly off the intraday low (110.45).

Yesterday's reversal of risk sentiment in the US also weighs on Asian markets. The dollar hit new short-term lows against most majors early this morning, but regained its composure later as equity selling slowed and as core (US) yields turned north again. EUR/USD filled offers above 1.23, but trades again in the mid 1.22 area. USD/JPY rebounds off the 110.20 area (currently 110.85). AUD/USD came close to the 0.80 barrier. The Aussie dollar was supported by strong consumer confidence data, but also eased later in the session on the overall USD rebound.

Today's eco calendar contains final EMU Dec CPI, US production and NAHB housing confidence. The Beige Book preparing the January 31 Fed meeting will be published and several central bankers speak. ECB's Villeroy mentioned the rise of the euro as a source of uncertainty. Is there more to come on this theme? Fed speak and the Beige Book might confirm that recent developments allow further Fed normalisation. Global sentiment on risk is a wildcard for FX trading. More risk-off probably won't help the dollar. Global Picture. Euro strength prevails as markets prepare for a change in policy from central banks outside the US. Especially the ECB is signalling a gradual turn. Looking at the fundamentals/interest rate differentials (2-y US/German spread at +250 bps), the euro rise/dollar decline has gone quite far. However, there is no trigger for a ST change in sentiment. The technicals turned USD negative as EUR/USD cleared 1.2090/1.2167 resistance. 1.2598 (62% Retracement) is next important resistance on the charts. Is this morning's intraday reversal a first tentative sign of USD bottoming?

Yesterday, slightly softer UK CPI data had only a limited impact on sterling. Cable mostly followed the broader USD price moves. EUR/GBP is holding a tight range near the 0.89 pivot. There are no important eco data in the UK today. BoE's Saunders will speak in London. More technical order-driven trading might be on the cards for sterling.

EUR/USD rally slows, but to clear sign of a trend reversal yet

Download entire Sunrise Market Commentary

The BOC is expected to deliver an Interest rate hike of 25bps today as it seeks to catch up with an economy that is flying high. BOC’s Governor Poloz will deliver his decision and Press Conference, where he will outline the factors involved in making the decision. Chief among them will be the broad underlying wage growth and strong price dynamics of the economy, coupled with excesses in the financial system. The Governor down-played NAFTA concerns in his December speech but as the Trade negotiations are on-going this week, they will remain a concern for the economy unless a positive resolution can be found. With this in mind, a somewhat dovish speech is expected today to balance strong economic performance with ongoing uncertainties, maintaining flexibility for future policy decisions. We await the BOC decision at 15:00 GMT.

German Harmonised Index of Consumer Prices (YoY) (Dec) was released unchanged at 1.6%, as expected. Wholesale Price Index (MoM) (Dec) was -0.3% v an expected 0.3%, from 0.5% previously. Wholesale Price Index (YoY) (Dec) was 1.8% v 3.3% previously. EURUSD sold off from 1.22676 to 1.22157.

UK Consumer Price Index (YoY) (Dec) was 3.0%, as expected, from 3.1% previously. Core Consumer Price Index (YoY) (Dec) was 2.5% v an expected 2.6%, from 2.7% prior. Consumer Price Index (MoM) (Dec) came in as expected at 0.4%, from 0.3% prior. Producer Price Index – Output (MoM) n.s.a. (Dec) was 0.4% v an expected 0.3%, from 0.3% previously, which was revised up to 0.4%. Producer Price Index – Output (YoY) n.s.a. (Dec) was 3.3% v an expected 2.9%, from 3.0% previously, which was revised up to 3.1%. Producer Price Index – Input (MoM) n.s.a. (Dec) was 0.1% v an expected 0.4%, from 1.8% previously, which was revised down to 1.6%. Producer Price Index – Input (YoY) n.s.a. (Dec) was 4.9% v an expected 5.4%, from 7.3% previously. PPI Core Output (MoM) n.s.a. (Dec) was 0.3% v an expected 0.2%, from 0.2% previously. PPI Core Output (YoY) n.s.a. (Dec) was 2.5% v an expected 2.3%, from 2.2% previously. GBPUSD sold off from 1.37826 to 1.37416 after the data release.

Australian Westpac Consumer Confidence (Jan) was released, coming in at 1.8%. The previous reading was 3.6%. This release sent the AUDUSD pair higher from 0.79636 to 0.79737.

Japanese Machinery Orders (YoY) (Nov) was released at 4.1% with a consensus of -0.7% expected, from 2.3% prior. Machinery Orders (MoM) (Nov) was released at 5.7% with a consensus of -1.4% expected, from 5.0% previously. USDJPY moved higher from 110.288 to test 110.427 after this data release.

Australian Home Loans was released at 2.1% v a consensus of -0.2%, from -0.6% previously. Investment Lending for Homes (Nov) was 1.5% from 1.6% prior. AUDUSD stepped higher to test 0.79990.

Chinese FDI – Foreign Direct Investment (YTD) (YoY) (Dec) was 7.9% from 9.8% previously.

EURUSD is down -0.26% overnight, trading around 1.22280.

USDJPY is up 0.35% in early session trading at around 110.833.

GBPUSD is down -0.15% to trade around 1.37701.

USDCAD is up 0.20%, trading around 1.24595.

Gold is down -0.34% in early morning trading at around $1,333.65.

WTI is down -0.17% this morning, trading around $63.72.

Major data releases for today:

At 10:00 GMT, Eurozone Consumer Price Index – Core (YoY) (Dec) will be released. The consensus is for an unchanged value of 1.1%. Consumer Price Index (MoM) (Dec) is expected to be 0.4% from 0.1% previously. Consumer Price Index (YoY) (Dec) is expected to be unchanged at 1.4%. Consumer Price Index – Core (MoM) (Dec) is expected at 0.2% from -0.1% prior. EUR pairs could see volatility pick up due to this data.

At 11:45 GMT, UK MPC Member Saunders is due to speak at the Financial Intermediary and Broker Association inaugural conference in London. GBP crosses could be moved by the comments made during this time.

At 14:15 GMT, US Industrial Production (MoM) (Dec) will be released. The consensus is for 0.4% from 0.2% previously. Capacity Utilization (Dec) is also released at this time with an expectation for 77.3% v 77.1% prior. USD crosses can be impacted.

At 15:00 GMT, US NAHB Housing Market Index (Jan) will be released with an expected reading of 72. The previous reading was 74. This release may affect USD pairs.

At 15:00, Bank of Canada Rate Statement will be made public. The Monetary Policy Report will be released and the Interest Rate Decision is expected to be 1.25% from 1.00% previously.

At 16:15, Bank of Canada Press Conference based on the decisions made earlier at 15:00 GMT.

At 19:00, US Fed’s Beige Book compiles anecdotal evidence from 12 Federal Reserve Banks regarding their local economic conditions.

At 20:15, US FOMC Member Mester will speak about Monetary Policy Communication at Rutgers University in New Jersey. Comments during the speech and during the following Q&A session afterwards could move USD pairs.

At 23:50, Japanese Foreign Investment in Japanese Stocks (Jan 12) will be released, with a prior reading of ¥597.9B. Foreign Bond Investment (Jan 12) will also be released at this time, with a previous reading of ¥173B.

Currency pair USD/JPY

The USD/JPY has reached the main -61.8% Fibonacci target and the round level of 110. Price bounced at that support and seems to be breaking through the resistance trend line (red).

The USD/JPY made one more lower low within the downtrend but now has made a bullish break above resistance (red). This could be a first signal of a reversal but price still needs to confirm a higher low.

Currency pair EUR/USD

The EUR/USD continued with its the uptrend with a new higher high but price seems to be moving lower again. The retracement is, however, still most likely part of a wave 3 (purple) unless 5-6 candles on the 4 hour chart fail to break the current high, which would indicate that wave 3 has been probably completed.

The EUR/USD retraced and bounced at the 38.2% Fibonacci level of wave 4 (orange) at 1.22. The bullish breakout above the resistance trend line (dotted red) caused price to make a new rally and a new higher high. The current bearish price action is probably a wave 4 (green) retracement.

Currency pair GBP/USD

The GBP/USD bounced at the local support (green lines) but the rally was unable to break above the strong resistance (orange). The orange horizontal line is the bottom of wave 1 on a weekly chart and a break above it indicates an invalidation of a long-term bearish wave count.

The GBP/USD bullish momentum could continue if price bounces at the Fibonacci support levels. Strong bearish price action, however, could also indicate the end of the bullish price action and the start of a reversal.

The common European currency has been in the spotlight recently, as the currency has reached long unobserved high levels. This event can also be observed on the EUR/CHF rate’s charts.

During the surge the pair broke previously mapped channels, extending the gains more than it was expected and pressing for a full review of the pair.

In general the rate has hit a combined resistance of two long term ascending channel patterns and began a decline.

The decline has taken the form of a narrow channel down pattern, which is set to encounter a lot of support, which means that the fall of the Euro against the Franc might soon end.

As the US Dollar extended its losses against the rest of the currency pairs, the USD/CHF pair was no exception. Moreover, previously drawn patterns have been broken. Due to that reason a full review of the currency exchange rate has been conducted.

First of all the most dominant channel’s support has been moved lower. Secondly a medium term pattern has been mapped. In addition, the already broken junior pattern can be observed on the chart.

Regarding the short term future, he pair is set to continue the rebound, which began against the combined support of the dominant and medium sized patterns.

Even though the Euro has increased its trading range against the US Dollar during the previous session, the pair has failed to form a distinctive movement either direction. The rate reached a new 2015/2017 high early today; however, further advance was restricted by the weekly R1 at 1.2311. Despite a failure to breach the 55-hour SMA, it seems that bears are gradually starting to provide resistance to the prevailing bullish sentiment. It is even possible that this moving average surrenders in this session, thus allowing for a test of the 100-hour SMA. If such scenario is to occur, the rate is likely to remain stranded between these lines for the remaining session. Conversely, the 55-hour SMA could provide an unbreakable support, thus sending the rate for the 1.23 area; this psychological level is expected to hold firm.

Downside risks prevailed during the first half of Tuesday. However, the 55-hour SMA proved to be an unbrekable resistance that pressured the rate back north. Similarly to EUR/USD, the Pound was stranded between the weekly R1 and the 55-hour SMA at 1.3823 and 1.3781, respectively. Meanwhile, the pair breaching a short-term ascending channel suggests that bears might eventually take the upper hand in the market. This scenario, however, depends on the rate’s ability to breach the aforementioned moving average. A subsequent fall should not exceed the 100-hour SMA located near the 1.37 mark. Even though an upward breakout should not be discarded, more weight is put on the bearish scenario, especially if the northern side is likewise reinforced by the monthly R3.

Similarly to other major currency pairs that include the US Dollar, it is apparent that the latter’s weakness has allayed during the previous trading session. One factor that helped the Greenback to stabilise against the Yen is a support cluster formed by the monthly S2 an d the weekly S1 circa 110.20. Considering that the rate has surpassed the 55-hour SMA, it could signal to further advance. This upside momentum, however, could be stopped by the 100-hour SMA—a level which was being tested at the time of this analysis. It is likely that both barriers confine the Greenback for several hours. Meanwhile, technical indicators are still in favour of a fall. In case this scenario is to occur, losses should be capped near the lower boundary of a four-month channel down near the 110.00 mark.

Following a minor period of consolidation during the first half of Tuesday, the bearish sentiment prevailed in the market and thus sent Gold down to the 1,332.00 area. Subsequently, the rate returned for a re-test of its four-month high of 1.344.03, but fell lower once again. These increasing fluctuations demonstrate that Dollar bulls might have finally increased in strength. However, no massive declines are expected today, as the pair should still be tended slightly upwards. At the time of the analysis, Gold was constrained by the 55– and 100-hour SMAs. Technical indicators suggest that the southern barrier should hold strong. Meanwhile, the nearest upside target is the aforementioned 1.344.03 mark, while the ultimate upside target for today should be the weekly R1 at 1,348.83.