.

'We think that market focus will be on any signals regarding the possibility of a US-UK trade deal. If the two parties send optimistic messages with regards to this prospect, sterling could extend its recent gains.' – IronFX (based on Business Recorder)

Pair's Outlook

As was anticipated, the demand cluster around 1.2515 limited downside volatility on Friday, also causing the GBP/USD pair to close at 1.2550, namely a 44-pip loss. However, the Cable opened with a small bullish gap today, which resulted in Friday's losses getting erased. Bears, on the other hand, are refusing to give in, as they continue pushing the Sterling lower. The support area around 1.2515 remains the closest one, where the exchange rate is expected to encounter an obstacle on its journey to the bottom. Meanwhile, technical indicators suggest the Cable could still erase its intraday losses and end the day in the green zone above the 1.26 mark.

Traders' Sentiment

Bullish market sentiment remains unchanged, with 62% of traders being long the GBP. The share of sell orders edged up from 49 to 54%.

'The weak U.S. GDP is doing the dollar no favours. But it also takes courage to keep buying the dollar considering what Trump has said about the kind of a currency policy he could pursue.' – Mizuho Bank (based on Reuters)

Pair's Outlook

In spite of a weaker US GDP reading on Friday, the Greenback still managed to outperform the Japanese Yen, successfully reclaiming the 115.00 level. The Buck is expected to retain its strength and continue outperforming the Yen, but there is still an issue that could prevent the pair from edging higher: the USD/JPY opened with a bearish gap under 115.00, while also having the 20 and the 55-day SMAs providing immediate resistance just above the opening price. The US Dollar's rally is unlikely to last, as we are about to have a sell signal, implying the pair is to edge lower by week's end. At the moment, technical studies are unable to confirm either scenario.

Traders' Sentiment

Today 52% of all open positions are short (previously 50%). Meanwhile, the portion of buy orders inched down from 69 to 59%.

'We've seen a rise in the amount of safe-haven buying in the past few weeks around the critical uncertainty in the U.S. and Europe, and the executive order signed by Trump has raised the uncertainty even higher.' – Daniel Hynes, ANZ (based on Reuters)

Pair's Outlook

The yellow metal began the week higher due to US Dollar weakness. The fall in the Greenback during the weekend was caused by uncertainty caused by US politics. Particularly, Donald Trump's signed policies are making their impact of uncertainty on the financial markets due to their unforecastable nature. From a technical perspective, the bullion is likely to surge up to the newly calculated weekly PP at 1,196.86. However, the commodity price is most likely to bounce off from the resistance level afterwards.

Traders' Sentiment

SWFX traders still remain almost neutral, as 51% of open positions are long on Monday. In the meantime, 58% of trader set up orders are to buy the bullion.

'It's good that banks are lending more to companies. But the whole thing is still fragile, because of the weak growth in Europe '. -Dirk Gojny, National Bank

Bank lending to the Euro zone's companies rose at the strongest pace in more than four years in December, while the total amount of money in circulation advanced more than expected, official data revealed on Friday. According to the European Central Bank, corporate bank loans in the 19-member state currency bloc climbed 2.3% in the reported month, following November's upwardly revised gain of 2.1%. Furthermore, household lending rose 2.0% in December, the largest gain since the middle of 2011, compared to the preceding month's 1.9% increase. The figure came in right in line with analysts' expectations. The Central bank also released its monthly data on the amount of money in circulation, which is an important indicator for predicting future economic activity. According to the Bank's report, the M3 Money Supply climbed 5.0% on an annual basis in the same month, following the prior month's 4.8% and slightly surpassing economists' forecasts for 4.9%.

Other data released by Destatis showed that German import inflation accelerated at a stronger than expected pace last month. Import prices climbed 1.9% in December, after growing just 0.7% in the previous month. Markets expected prices to increase 1.3% in the reported month.

'Prospects for future activity look better than they have in some time, pointing to the need for companies to increase activity for what seems to be better demand '. -Mickey Levy, Berenberg Capital Markets

US economic growth slowed markedly in the last quarter of 2016 amid lower shipments of soybeans that bolstered exports. The Commerce Department reported the economy grew at an annualized pace of 1.9% in the three month period to December, after expanding 3.5% in the Q3. Market analysts expected the economy to grow at a 2.2% rate in the Q4. For all of 2016, growth was 1.6%, the weakest sine 2011. Low oil prices and the strong US Dollar put downward pressure on the economy last year. In the Q4, exports posted a 4.3% decline, the largest since the Q1 of 2015, compared to a 10% surge in the prior quarter. Weak exports contributed most to the fourth-quarter drop, offsetting strong consumer spending and business investment. The Commerce Department reported also that orders for durable goods dropped 0.4% month-over-month in December, missing expectations for a 2.7% increase. Meanwhile, November's fall was revised up to 4.5% from 4.6%. The December decline was mainly driven by low orders for defense capital goods, which fell 33.4%, the largest monthly drop since May 2014. Excluding automobiles and transportation equipment, orders for core durable goods climbed 0.5%, in line with analysts' forecasts, whereas the previous month's gain of 0.5% was revised up to 0.6%.

News and Events:

Double whammy for Turkey

On Friday, Fitch downgraded Turkey's sovereign debt to junk, while Standard & Poor's cut its outlook for the country “from stable” to “negative”. S&P already cut Turkey two notches below the investment grade threshold back in November last year, while Moody's downgraded it to junk last September. Fitch was therefore the last agency to offer an investment grade. In a statement on Friday, Fitch explained its motive: "Political and security developments have undermined economic performance and institutional independence”. Even though the move was broadly expected, it still sent a negative signal to investors.

The Turkish lira's reaction was relatively muted as the decision was already priced in. USD/TRY has been moving sideways at around 3.87 as investors are reluctant to increase their short TRY positions. Indeed, the central bank increased its overnight lending rate by 75bps to 9.25% but kept its two other benchmarks unchanged. Right now, the CBT is stuck between a rock and a hard place. We believe that it is doing its best to maintain order itself despite pressure from investors, who want tighter monetary policy, and the government which is pressurising the bank to keep lending rates as low as possible. CBT's behaviour moving forward will be key in determining the outlook for the lira. Ultimately, the bank will either decide to protect its credibility or to obey the government.

Weak US data but markets are instead focused on Trump

US GDP came in on Friday at 1.9% y/y, marking the 11th consecutive year of growth below 3% (estimates were about 2.2%). The decrease in exports, associated with more significant imports, has driven GDP lower. In addition, consumption is somewhat sluggish with a decline.

Markets on Friday ended slightly lower. The S&P 500 closed below 2300 points. Markets remain upbeat about Trump's plan to stimulate the economy through tax cuts and infrastructure spending. In the latest revelations, Trump stunned this weekend with his selective immigration ban, providing a clearer picture of his aggressive political intent. The dollar has been weakening since the opening last night.

Looking at the markets, we believe that it is unlikely that the Fed will raise rates in the first half of 2017. Data is barely moving markets and Trump's ability to deliver is actually a key factor for the Fed to assess the US economic situation. Inflation is needed in the US and we maintain our view that the US central bank will let it run in order to kill its massive debt. For this reason, we remain bullish EUR/USD over the medium-term.

Today's Key Issues (time in GMT):

• 4Q P GDP QoQ, exp 0,70%, last 0,70% EUR / 08:00
• 4Q P GDP YoY, exp 3,00%, last 3,20% EUR / 08:00
• Jan KOF Leading Indicator, exp 102,9, last 102,2, rev 102,1 CHF / 08:00
• Nov Wages Non-Manual Workers YoY, last 1,90% SEK / 08:30
• janv..27 Total Sight Deposits CHF, last 532.3b CHF / 09:00
• janv..27 Domestic Sight Deposits CHF, last 464.3b CHF / 09:00
• ECB's Nowotny Briefs Vienna Business Journalists' Club EUR / 09:00
• Jan FGV Inflation IGPM MoM, exp 0,70%, last 0,54% BRL / 10:00
• Jan FGV Inflation IGPM YoY, exp 6,71%, last 7,17% BRL / 10:00
• Jan Economic Confidence, exp 107,8, last 107,8 EUR / 10:00
• Jan Business Climate Indicator, exp 0,8, last 0,79 EUR / 10:00
• Jan Industrial Confidence, exp 0,2, last 0,1 EUR / 10:00
• Jan Services Confidence, exp 12,7, last 12,9 EUR / 10:00
• Jan F Consumer Confidence, exp -4,9, last -4,9 EUR / 10:00
• Central Bank Weekly Economists Survey (Table) BRL / 10:25
• Dec South Africa Budget, last -16.33b ZAR / 12:00
• Jan P CPI YoY, exp 2,00%, last 1,70% EUR / 13:00
• Jan P CPI MoM, exp -0,50%, last 0,70% EUR / 13:00
• Jan P CPI EU Harmonized MoM, exp -0,70%, last 1,00% EUR / 13:00
• Jan P CPI EU Harmonized YoY, exp 2,00%, last 1,70% EUR / 13:00
• ABRAS December Supermarket Sales BRL / 13:00
• Dec Personal Income, exp 0,40%, last 0,00% USD / 13:30
• Dec Personal Spending, exp 0,50%, last 0,20% USD / 13:30
• Dec Real Personal Spending, exp 0,30%, last 0,10% USD / 13:30
• Dec PCE Deflator MoM, exp 0,20%, last 0,00% USD / 13:30
• Dec PCE Deflator YoY, exp 1,70%, last 1,40% USD / 13:30
• Dec PCE Core MoM, exp 0,10%, last 0,00% USD / 13:30
• Dec PCE Core YoY, exp 1,70%, last 1,60% USD / 13:30
• janv..27 Bloomberg Nanos Confidence, last 56,4 CAD / 15:00
• Dec Pending Home Sales MoM, exp 1,10%, last -2,50% USD / 15:00
• Dec Pending Home Sales NSA YoY, last 1,40% USD / 15:00
• Jan Dallas Fed Manf. Activity, exp 15, last 15,5 USD / 15:30
• Dec Central Govt Budget Balance, exp -68.7b, last -38.4b BRL / 16:30
• Dec Net Migration SA, last 6220 NZD / 21:45
• janv..29 ANZ Roy Morgan Weekly Consumer Confidence Index, last 117 AUD / 22:30

The Risk Today:

EUR/USD's momentum is still largely positive despite ongoing bearish consolidation. Hourly resistance area is given at around 1.0800. Hourly support lies at 1.0590 (19/01/2016 low) and 1.0341 (03/01/2017 low). Expected to see continued increase towards 1.0800. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD's demand has largely increased towards 1.2771 fading around 1.2550. The technical structure is still anyway showing positive potential. Hourly support is given at 1.2254 (19/01/2016 low). Expected to show further bullish move. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY has surprisingly exited the downtrend channel after monitoring resistance implied by the upper bound. Hourly resistance is given at 115.62 (19/01/2016 high) while hourly support is given at 111.36 (28/11/2016 low). Expected to see further downside moves. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF's momentum is bearish. Yet, the selling pressures are being reduced below parity. Key resistance is given at a distance at 1.0344 (15/12/2016 high). The road is nonetheless wide-open for further decline. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

Although Donald Trump policies will remain to be the key moving indicatorsfor financial markets in the days and weeks to come, central banks and economic data will attract some attention the week ahead.

The Fed

In December, the Federal Reserve signaled that they may rise rates three times in 2017 however it looks certain that Wednesday's meeting won't be one of the three.

The U.S. economy grew at slowest pace in five years in 2016 by only 1.6%, but another favored indicator for the Federal Reserve, the final domestic sales number which excludes inventories and trade, expanded by 2.5% in Q4 compared to 2.1% in the previous quarter.

In contrast, consumer prices rose in 2016 at the fastest pace in five years to break above 2.0% suggesting that the Fed's favored PCE data will edge closer to the 2% targeted inflation.

However, the biggest unknown factor remains to be fiscal policies and since there's no clear roadmap yet the Fed will take no action and like us they will keep monitoring Trump's announcements.

Since Wednesday's interest rate decision won't be accompanied by a press conference or economic and rate projections, it's going to be all about the released statement. A hawkish tone that opens the door for a rate hike in the following meeting will likely give another push for the dollar given that only 25% is being priced in for a rate increase in March.

Other Central Banks

Sterling traders will also be interested in Bank of England's Super Thursday, when the central bank announces interest rate decision along with its quarterly inflation report. Just like the Fed, the BoE isn't likely to take any actions on Thursday leaving interest rates and quantitative easing measures unchanged. But given that the pound has dropped by more than 15% against the dollar and around 12% on trade weighted basis since the Brexit vote - inflation expectations will probably push the central bank towards a more hawkish tone giving a reason for traders to buy the pound on the dips.

The least interesting central bank meeting is going to be Bank of Japan. Although we believe that the next step is likely to be tightening monetary policy, I think it's still very early to announce any future tightening measures. Thus, the Yen will likely take its cue from risk appetite/aversion in financial markets.

Friday's NFP

On the data front, the U.S. is expected to have added 171K non-farm payroll jobs in January, up from 156K in December. Meanwhile, average hourly earnings are forecasted to rise by 0.3% compared to 0.4% in the previous month. If the data doesn't deviate a lot for expectations the impact on the dollar will be limited, and investors' attention will turn back to the White House.

EUR/USD

Current level - 1.0721

My outlook here is negative, for a break through 1.0656 low towards 1.0580 area.

Profit-taking affects gold curbing silver and platinum

USD/JPY

Current level - 114.58

Today's pullback should be considered corrective, before another leg upwards, to 116.70 area. Initial intraday support lies at 114.10.

GBP/USD

Current level - 1.2563

The bias is still negative, for a slide towards 1.2415 zone. Key hurdle lies at 1.2608.

• Rates: German inflation expected to hit 2% - More Bund losses?
  German inflation is expected to hit the psychological 2%-mark for the first time since the end of 2012 which could inflict more losses on the Bund in the wake of last week’s hawkish German ECB comments and technical break below the neckline of a double top. Risk sentiment is a wildcard for trading following this weekend’s executive orders by US President Trump.
• Currencies: Trump-migration uncertainty to weigh on the dollar?
  At the end of last week, the dollar showed tentative signs of bottoming out. However, the uncertainty on the Trump immigration measures might create some nervousness on global markets. It weighs slightly on the dollar this morning. Is a further risk-off driven correction of the dollar in store?

The Sunrise Headlines

• On Friday, US equities ended a dull session virtually unchanged, digesting new all-time highs set earlier in the week. Many Asian markets are closed. The others open in a modest risk off mode on Trump’s immigration orders. For similar reasons, bonds and gold are a bit higher and the dollar weaker.
• Former French Education Minister Hamon beats Manuel Valls for the Socialist presidential nomination by an provisional 59% to 41%.
• Italy’s €20B government rescue fund is sufficient to recapitalize the country’s troubled banks, and about a third of the money will be used for Monte Dei Paschi, Bank of Italy governor Visco said
• Turkey’s rating was cut to BB+ from BBB- by Fitch with stable outlook. It cited the toll of political developments on the nation’s economy as the main reason. S&P and Moody’s also have a junk rating for the country, suggesting that more investors may now shun Turkey’s debt.
• Fitch affirmed Denmark’s AAA rating stable outlook which reflects their wealthy, high-value added and diversified economy, strong institutions, low public debt and solid external finances. It also affirmed Spain’s BBB+ rating (outlook stable). S&P affirmed the Slovak A+ rating (stable outlook)
• Global opposition to U.S. president Trump intensified, as world leaders including Canadian PM Trudeau and German Chancellor Merkel denounced his decision to limit entry from seven Muslim countries in the name of fighting terrorism.
• Today, the eco calendar contains the January EMU economic confidence report and the German inflation data, while Spain and Belgium report their Q4 GDP. In the US, the December personal Income and Spending data are released.

Currencies: Trump-Migration Uncertainty To Weigh On The Dollar?

Trump measures to block USD comeback?

On Friday, the focus of USD traders was on the US Q4 GDP. The report was slightly softer than expected. The dollar lost a few ticks, but the move is technically insignificant. EUR/USD closed the day at 1.0699 (from 1.0682). USD/JPY finished the day at 115.10 (from 114.53).

This morning, a lot of Asian markets are closed for the Lunar New Year. The immigration measures of US President Trump are modestly negative for global risk sentiment. The Trump-driven uncertainty weighs on the dollar and supports the yen. USD/JPY is trading in the 114.50/60 area. Japanese Dec retail data disappointed, but had limited impact on yen trading. EUR/USD is changing hands in the 1.0725 area, as markets await the impact of the Trump measures on European and US (equity) markets.

Today, the US data, PCE and pending Home sales, won’t affect markets much. The former are already included in Friday’s Q4 GDP report. The latter are no market mover. In EMU, German inflation is expected to have dropped sharply M/M, but Y/Y inflation is expected to jump to 2% from 1.7% Y/Y (energy base effect). If confirmed, the release might be politically sensitive and increase German resistance against the ECB’s very accommodative policy. The EMU confidence data (source: EC) are expected broadly stable after a substantial improvement in previous months. Finally, we get the first EMU Q4 GDP figures of Spain and Belgium ahead of tomorrow’s EMU Q4 GDP. Markets are expecting a 0.4% Q/Q and a 1.7% Y/Y increase (for EMU). We see risks on the upside. The EMU data might be slightly euro supportive, but the focus for FX trading will be on global issues. Investors will try to assess the impact of the US immigration measures on specific parts of the economy and on global markets sentiment. Of late, it mostly ignored potential negative side-effects the Trump policy. The jury is still out whether recent measure will derail the reflation trade. In a day-to-day perspective, investors might turn a bit more cautious on global risk and on the dollar. So, last week’s USD bottoming out process might stop. Especially, EUR/USD 1.0775 resistance remains with reach and might come again under pressure. The downside of USD/JPY looks a bit better protected. Markets dislike being too yen long ahead of tomorrow’s BOJ meeting.

Global context: EUR/USD touched a multi-year low (1.0341) early this month. After the Trump rally, plenty of good USD news was discounted while US/EMU rate differentials narrowed (correction), causing a dollar correction. Longer-term, the absolute interest rate support should provide a USD floor, if US data remain good and as long as there are no profound doubts on Trump’s pro-growth policy. The day-to-day USD momentum improving slightly at the end of last week, but the jury is still out whether this might be the start of a new upleg. A return above EUR/SD 1.0874 would question the USD positive outlook. On the downside, EUR/USD 1.0341 is the first key support. USD/JPY is trading well off the post-Trump highs (118.60/66). The rebound off the 112.57/53 reaction low was quite constructive. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is a tough support

EUR/USD: USD comeback to slow on Trump immigration measures

EUR/GBP

Sterling rebound slows

On Friday, sterling trading entered calmer waters, as investors awaited the outcome of the meeting between UK PM May and US president Turmp. EUR/GBP gradually returned north of 0.85. Political comments suggest that the UK labour party won’t be very aggressive in trying to amend the Brexit blil in order to reach a softer Brexit. This was slightly negative for sterling. The meeting between UK May and US president Trump developed in a constructive environment, but the direct impact on sterling was limited. Negotiations on a trade agreement might start in the near future. EUR/GBP closed the session at 0.8526 (from 0.8480). Cable finished the day at 1.2555 (from 1.2597). So, sterling softness prevailed.

Today, the UK calendar is uneventful. Cable hardly profits from USD weakness overnight and EUR/GBP is trading relatively strong in the 0.8535 area. So, it looks that sterling still trades with a soft bias at the start of the new week. The global context (slightly risk-off?) will set the tone for sterling trading. It might be a slightly negative for the UK currency. Markets will also look forward to Thursday’s BoE meeting. Despite recent good eco data, the BoE probably will maintain a wait-and-see stance and give no indication on a rate hike. Longer term, we still look to sell sterling as long as there is no clear indication that the BoE prepares to tighten policy to fight rising inflation. The Brexit divorce remains a complicated process. Sterling momentum was strong of late, but eased a bit at the end of last week. EUR/GBP 0.8579 50% retracement and 62% retracement (0.8515) of the 0.8304/0.8854 rebound is broken. The correction low comes in at 0.8451 and should provide strong support. A break would be technical significant. We look for confirmation of last week’s bottoming out process in EUR/GBP

EUR/GBP: 0.8450 support remains intact for now

Download entire Sunrise Market Commentary

EUR/JPY Daily Outlook

Daily Pivots: (S1) 122.42; (P) 122.87; (R1) 123.51; More...

EUR/JPY is staying in the consolidation pattern from 124.08 and intraday bias remains neutral. On the upside, break of 124.08 will extend the larger rally from 109.20 to 126.09 key resistance next. On the downside below 120.54 will bring another fall. But in that case, downside should be contained by 118.45 cluster support (38.2% retracement of 109.20 to 124.08 at 118.39) and bring rebound.

In the bigger picture, price actions from 109.20 medium term bottom are seen as part of a medium term corrective pattern from 149.76. There is prospect of another rise towards 126.09 key resistance level before completion. But even in that case, we'd expect strong resistance between 126.09 and 141.04 to limit upside, at least on first attempt.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box