FX weekly outlook Feb 26 - Mar 2

Overall financial market’s sentiment has been positive this past week. There were not much of risk-on rush though, due to several factors to be clarified. First sign for potential faster tightening by ECB came from meeting of EU finance ministers this week. A spanish hawk, mr de Guindos has been nominated as ECB Vice-President. Next several months will show, whether is he going to be first candidate to replace Mario Draghi, ending a long-term era of cheap borrowed funds in Europe.

One more important topic has been discussed on other side of Atlantic. FOMC January Meeting Minutes have not resolved all questions about possible faster hiking path of Federal Reserve this year. This was the last meeting for Yellen as Fed Chairwoman. Next big event for the market is new Chairman, Jerome Powell, testimony on the economy before congressional committees. Equities, bonds and currencies will be looking for direction depending on how hawkish will be his views at the speed of tightening.

US Dollar was recovering during this past week, working out bullish divergences on daily chart. However, this recovery was limited, as sellers were reacting on equities’ bullish rallies. General direction remains the same on long-term perspective. Fundamentally, there is not reason for world reserve currency to appreciate together with strong and sustainable recovery of the world-wide economy. Risk appetite attracts traders to buy high-yield assets, emerging markets are among biggest gainers.

EUR/USD has found a rock solid support at 1.22 level, with huge volume demand at this level and lots of buy orders placed. The only delay for bulls is political risks hedging. There will be elections in Italy and important SPD vote in Germany on March, 4, so we should not expect the pair to appreciate significantly next trading week. But we might see a repetition of weekend gap the same way as it happened in May 2017, right after French elections.

Technically speaking, there is a sideway consolidation range, with resistance to be breached more likely. Levels to watch for long positions: 1.22000 and 1.22500. Key fundamental events to monitor next week: US PCE Deflator, which is used by Federal Reserve to control inflation, and Eurozone Flash Inflation report.

British pound bears failed to push the pair lower than support levels from previous week, despite weaker-than-expected UK GDP Q4 reading, revised down to +1.4% YoY from +1.5% expected. Next week’s UK PMI report is going to show whether BoE would have additional pressure to tighten faster than previously anticipated. 1.40000 resistance looks as important pivot point to breach before sterling performs further strength.

USD/JPY recovered previous losses, testing resistance at 108.00 level this past week. Fundamentally, Japanese economy confirms sustainable growth, and BoJ officials are not interested in further strength of the currency, continuing injecting additional liquidity to the system and intervening verbally. Next week’s Chinese Manufacturing PMI will influence risk appetite from Asian investors. In case of a strong reading and with a condition of bullish equities, USD/JPY might test 109.00 resistance.

USD/CAD bounced from overbought levels last Friday on stronger-than-expected Inflation report. 1.27000 levels looks to be a tough task for bulls, so the pair should pullback down to 1.25000 support in case of fundamental environment will be in favor for BoC to keep hiking interest rates in 2018.