US Dollar tumbles across the board as USD/JPY rate checks rattle markets: More pain ahead?

FUNDAMENTAL
OVERVIEW

USD:

The US Dollar sold off
across the board on Friday following rumours of the NY Fed conducting rate
​checks on the USD/JPY pair. The market took that as a signal of a potential
intervention to strengthen the Japanese Yen and the unwinding of positions
weighed on the greenback.

This wasn’t a
fundamental-driven move but a “technical” one. In general, such reactions are eventually
faded in the following days. The problem for the dollar is that there’s no
strong reason for it to appreciate yet.

This week, we have the FOMC
decision on Wednesday where the central bank is expected to keep interest rates
unchanged and maintain a data-dependent approach for the next rate cuts. There
shouldn’t be any surprise at this meeting. February might be key for the US
Dollar as we get another set of economic data, with the NFP report likely being
pivotal for the market pricing.

In fact, we’ve been seeing
notable improvements in the US Jobless Claims data that could point to a re-acceleration
in the labour market. The market is still pricing 48 bps of easing by year-end.
Those bets are likely to be pared back in case the data strengthens and should
provide support for the greenback.

EUR:

On the EUR side, Trump
scrapped his tariffs threat after he reached a “framework” of a deal for Greenland
in Davos, so that growth risk got priced out. In terms of monetary policy, the ECB
remains in a neutral stance reaffirming its data-dependent and
meeting-by-meeting approach to policy decisions.

ECB members continue to
repeat that the current policy is appropriate, and they won’t respond to small
or short-term deviations from their 2% target. The data has been supporting the
central bank’s neutral stance, with inflation data recently surprising to the
downside and PMIs showing a bit of a slowdown.

EURUSD TECHNICAL
ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can
see that EURUSD rallied hard last week and almost
reached the cycle high around the 1.1918 level. This is where we can expect the
sellers to step in with a defined risk above the cycle high to position for a
drop into the 1.14 handle. The buyers, on the other hand, will want to see the
price breaking higher to increase the bullish bets into the 1.23 handle next.

EURUSD TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, we can
see more that we have an upward trendline defining the bullish momentum on this
timeframe. From a risk management perspective, the buyers will have a better
risk to reward setup around the trendline to position for a rally into new
highs. The sellers, on the other hand, will look for a break lower to increase
the bearish bets into the 1.14 handle next.

EURUSD TECHNICAL ANALYSIS –
1 HOUR TIMEFRAME

On the 1 hour chart, we can see that we have the gap acting as support. The
buyers will likely step in here with a defined risk below the gap to keep pushing
into new highs, while the sellers will look for a break lower to extend the
pullback into the trendline. The red line define the average daily range for today.

UPCOMING CATALYSTS

Tomorrow we have the weekly US ADP jobs data and the US Consumer Confidence
report. On Wednesday, we have the FOMC policy announcement. On Thursday, we get
the latest US Jobless Claims figures. On Friday, we conclude the week with the
US PPI report.