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The Dollar is in charge until further notice



On Friday, the jobs report highlighted the generally strong US labour market, with 225k jobs added in January, more than the Bloomberg consensus NFP estimate of +160k. The report unsurprisingly sparked little volatility. The market will tune into the Fed Chairman Powell’s semi-annual testimony to Congress is on Tuesday and Wednesday.


Last week marked the best five-day stretch for the dollar since the first week of November. The straight-line move higher is likely to give-way to choppier price action with FX volatility hovering near record lows. But broadly speaking the outlook remains bullish for the dollar, with its best levels since early 2017 on the horizon. Looking for new cycles in the US Dollar Index (DXY) and the 100-line to be met soon.


Fed Chair Powell testifies before Congress on Tuesday & Wednesday, CPI is due

out on Wednesday, concluded by Retail Sales and Consumer Sentiment Index on Friday.


GBP/USD weakness to persist. It’s a mix of Brexit politics and dollar strength that are likely to weigh on GBP/USD in the weeks ahead. From a technical standpoint, the support area (1.2940/1.3000) discussed last week gave-way to selling, further bolstering our negative directional bias. The successful test of the post-Brexit vote low in August may indeed turn out to be a major long-term inflection point, but further retracement looks to be the path for now.


How low can GBP/USD go? In the near-term there is support at around 1.2700, but a retrenchment towards the 1.2400-area could be in the works before sterling reasserts itself.


Preliminary UK Q4 GDP is due out on Tuesday.


GBP/USD Daily Time-frame – Further weakness expected


The euro has eyes for new cycle lows. Last week, a few pieces of data out of the Euro zone/Germany helped undermine the single-currency. As noted last Tuesday regarding the technical outlook, short-term euro strength is to be viewed with caution, with the 1.1000-line expected to break at some point. Indeed, last week EUR/USD closed at 1.0943. There may be a short-term retracement, but a new cycle low beneath 10879 is likely to come soon.


Euro-zone Industrial Production on Wednesday, German CPI on Thursday, and German and Eurozone GDP on Friday.


Canada nearing breakout territory. The Canadian jobs report released on Friday also showed stronger employment growth; +34k jobs added in January vs +17.5k expected. The USD/CAD outlook became interesting last week with it putting pressure on a major ceiling from 1.3280 up to 1.3382. A rally above the upper bounds of this zone could have the pair soon picking up steam and sustaining a rally in the months ahead. Last year marked the smallest trading range since 1996, and on that a breakout is expected to develop at some point. We may just about be there.


The Yen remains at the mercy of risk trends. Risk sentiment is to remain the driver here (coronavirus the primary risk); Nothing new here, though, with 1-month and 3-month correlations between USD/JPY and the S&P 500 at 0.81 and 0.62, respectively. USD/JPY faces a sizeable technical hurdle around 1.1000.


Aussie threatening to further probe 2008/09 levels. A backdrop of a softer central bank policy outlook, coronavirus, and the leading dollar keeps significant pressure on AUD/USD. The market is pricing in a 60% chance of a 25-bps cut at the April meeting. On a related front, the RBNZ is expected to hold rates at 1% on Tuesday. On the technical front, the only positive for AUD/USD is that strong support is still holding around 6670. This isn’t likely to be the case for long, though, and any bounce from here is at high risk of failing.


Volatility edged higher, and deflated nearly as fast – now what? Participants in developed market currencies seem little concerned about, well, anything. The JP Morgan G7 Volatility Index hovering off record lows demonstrates just how complacent the market has become despite a number of risks. While we don't know exactly what will drive the next volatility cycle, we do know vol sitting at these depths can turn quickly, and for reasons that only become clear in the rear-view mirror. With that said, we remain vigilant in (strangely) calm seas.


In summary the US dollar price action could turn choppier, but to remain generally strong. USD/CAD is in breakout territory. Cable to stay under pressure for the foreseeable future. The euro is on track for new cycle lows. The yen will sway with risk trends. Aussie is threatening to trade at levels not seen since the 2008 Global Financial Crisis.

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