EUROPEAN FX UPDATE: Dollar dragged lower again, JPY boosted by wage data, EUR/USD above 1.04

DXY: DXY -0.4%; 107.55

• DXY lower for a third consecutive session as markets continue to price in a more constructive trade environment after Trump's concessions to Mexico and Canada earlier in the week. That being said, it remains to be seen how durable this optimism will be given that the tariffs were only delayed by one month, China’s retaliatory tariffs on the US come into effect on February 10th and Trump also firmly has the EU in his sights. From a US macro perspective, today sees the release of ADP in the run-up to Friday NFP print, whilst ISM services data is also due. Fed speak sees remarks from Barkin, Goolsbee and Jefferson. So far, the messaging from Fed officials this week has been one of caution with regards to further rate cuts. DXY has crossed below its 50DMA @ 107.77 with the next downside target coming via the 30th Jan low @ 107.50.

EUR: EUR/USD +0.3%; 1.0412

• EUR/USD has gained a footing above the 1.04 mark, which is in stark contrast to the 1.0209 trough seen at the start of the week. This has mainly been as a result of the easing trade tensions between the US and Mexico/Canada. However, as we mentioned yesterday, the EU is still very much in Trump's sights and a more complex issue to resolve given that his issue with the EU is trade-based and not border-based (as was the case with Canada and Mexico). As such, some desks have warned of complacency with the current recovery in the pair which has driven it to a current session peak @ 1.0417 which is bang on its 50DMA. Elsewhere, final EZ PMI and the ECB's latest wage tracker data had little sway on EUR. ECB Chief Economist Lane is due to speak @ 14:00GMT.


• EUR/USD opex: 1.0300-05 (1.6bln), 1.0310-15 (893mln), 1.0335 (1bln), 1.0400 (815mln), 1.0420-30 (2.2bln).

JPY: USD/JPY -1.0%; 152.77

• JPY is the best performer across the majors following hot Japanese Labour Cash Earnings data overnight (4.80% vs. Exp. 3.60%, Prev. 3.90%). In response to the data, ING stated that, "If Shunto results are as strong as last year's, we expect the Bank of Japan to hike by 25 basis points as early as May". As it stands, only around 5bps of tightening is priced by the May meeting. USD/JPY is now at its lowest level since 13th Dec 2024 with the next downside target coming via the 200DMA @ 152.84.


• USD/JPY opex: 153.15-25 (2.2bln), 154.00 (1.3bln), 155.60 (900mln).

GBP: GBP/USD +0.3%; 1.2521

• GBP once again on the front foot vs. the USD, whilst steady vs. the EUR. UK-specific drivers are on the light side in the run up to tomorrow's BoE rate decision which is widely expected to see a 25bps rate cut via an 8-1 vote split. Attention will be on any tweaks to forward guidance and how macro projections in the accompanying MPR indicate how loose/tight the MPC views current policy. Ahead of the announcement, The Times' Shadow BoE MPC voted 5-4 in favour of lowering the base rate by 25bps to 4.50%. UK services PMI was revised lower but GBP was unfazed. Cable up for a third session in a row with Monday's 1.2248 trough very much in the rear-view mirror. The pair has also eclipsed its 50DMA @ 1.2501 with the next target coming via the 7th Jan YTD peak @ 1.2575.

Antipodeans: AUD/USD +0.4%; 0.6281. NZD/USD +0.6%; 0.5683

• Both near the top of the G10 leaderboard as optimism around trade continues to percolate following the easing of tensions between the US, Mexico and Canada earlier in the week. It remains to be seen whether this optimism is unfounded for the antipodes given that China’s retaliatory tariffs on the US come into effect on February 10th. Nonetheless, AUD/USD is now up for a third consecutive session after hitting its lowest level since April 2020 on Monday; now eyeing its 50DMA @ 0.6292. NZD/USD is also up for a third consecutive session after hitting its lowest level since October 2022 on Monday; now eyeing its 50DMA @ 0.5699.

05 Feb 2025 - 09:55- ForexData- Source: Newsquawk