Asian equities rose, extending a two-week global rally, after US stocks posted strong gains late on Friday and UST yields retreated below 2.90%. The USD slipped against most major currencies as markets focus returns to US monetary policy with two appearances this week from Federal Reserve Chairman Jerome Powell, beginning with his semi-annual Humphrey-Hawkins testimony tomorrow afternoon where he will set out Fed thoughts on US rates for the year ahead.
Elsewhere, JPY firmed (vs. USD) as Bank of Japan Governor Haruhiko Kuroda said the central bank has no plan to overhaul its current form of easing.
Over the weekend, Bank of England Deputy Governor Dave Ramsden said that they might need to raise interest rates somewhat sooner than expected if wage growth picks up early this year (Sunday Times). Markets now turn to Deputy Governor Cunliffe who speaks this evening at 18:00 ahead of Prime Minister May’s speech on Friday, where she is to outline plan for UK/EU future partnership.
A number of event risks in the coming week could have an impact on broader market risk appetite, including elections in Italy (Sunday), government formation in Germany, ongoing NAFTA negotiations (due to run from 25 February to 5 March) and concerns about the sustainability of growth in China.
In our view, EUR faces downside risks this week in the run-up to elections in Italy, where polls indicate that the euroskeptic Five Star Movement lead in the polls (27%). M5S previously called for a referendum on Italy leaving the euro area, although the party has since softened its stance, with its leader commenting that that he does not “want to consider that last resort” in February.
A more immediate EUR effect could come from Germany’s SPD party vote on whether to join Angela Merkel’s grand coalition. Rejection of the coalition portends downside risks to EUR over days or weeks on the reassessment of long-term EU prospects.
Our traders see EURUSD support at 1.2250 and 1.2200 whilst resistance is at 1.2360 ahead of 1.2435. EURGBP resistance remains around the 0.8800 area with support at 0.8730 and 0.8685.