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• US Dollar ındex recovers modestly on upbeat housing data.
• Wall Street gains traction following a mixed start to the day.
• Coming up: Employment report from Japan.

After losing more than 60 pips on Wednesday, the USD/JPY pair slumped to a 15-day low of 108.50 today. However, with the major equity indexes in the U.S. gaining traction in the last hour, the pair started to retrace its daily drop and was last seen trading at 108.75, still down 0.25% on the day.

During the first half of the day, the greenback’s market valuation drove the pair’s price action. Pressured by the dovish shift in the FOMC’s language, the US Dollar Index slumped to a 3-week low of 95.16 before rebounding on the back of upbeat housing data. Commenting on the Fed’s policy outlook, “The Fed policy that keeps the U.S. economy strong is good for Japan’s economy too, said Bank of Japan (BoJ) Deputy Governor Amamiya earlier today.

The U.S. Census Bureau today reported that new home sales in November increased by an impressive 16.9% on a monthly basis in November and beat the analysts’ estimate of 2.9% by a wide margin. At the moment, the DXY is virtually unchanged on the day at 95.38.

In the meantime, major equity indexes in the U.S. started the day on a mixed note but recently turned north led by strong gains in the technology sector. As of writing, the Nasdaq Composite was adding 1.4% on the day while the S&P 500 was up 0.7%. The Dow Jones Industrial Average, which lost as much as 0.6% in the first hour following the opening bell, was almost flat on the day.

In the Asian session on Friday, the unemployment rate, which is expected to tick down to 2.4% in December, will be released from Japan.

Key technical levels

The initial support for the pair aligns at 108.50 (daily low) ahead of 108 (Jan. 14 low) and 107.50 (Jan. 4 low). On the upside, resistances are located at 109.10 (20-DMA), 110 (psychological level) and 110.35 (50-DMA).

• The pair keeps the bid tone intact in the 1.1500 area.
• The greenback is unable to shrug off Fed-led weakness.
• US Initial Claims shoot to 253K WoW.

The bid tone around the shared currency remains intact on Thursday, with EUR/USD managing to keep daily gains and business around 1.1500 the figure.

EUR/USD gains capped by Fibo retracement

The pair is trading in the positive territory since last Friday, managing to gain around 2 cents since the ECB-sponsored sell-off sent it to fresh 2019 lows in the 1.1290/85 band.

The upbeat sentiment around spot has been reinforced in past hours in response to the dovish tone from the FOMC, which now sees the Federal Reserve shifting to a neutral stance and more data-dependent.

In addition, news of a potential meeting between Trump and Xi Jinping in February has been also fuelling speculations over a probable trade deal and is also keeping the buck under pressure.

In the data space, EMU’s flash Q4 GDP figures came in at 0.2% QoQ and 1.2% YoY, in line with prior surveys. Across the pond, Initial Claims jumped 253K WoW although largely due to the US shutdown. Further US data saw the Employment Cost Index (ECI) at 0.7% in Q4, a tad below estimates.

What to look for around EUR/USD

USD-dynamics will drive the sentiment in the pair in the very near term, showing some upside potential in response to the now neutral stance from the Federal Reserve. However, fundamentals in the euro region are not something to write home about and this carries the potential to weigh on the single currency in the next months. Politics in Euroland will also be a factor to have in mind, with EU parliamentary elections coming up in May and investors closely following the social scenario in France and populist developments in Italy.

EUR/USD levels to watch

At the moment, the pair is gaining 0.19% at 1.1491 facing the next up barrier at 1.1514 (high Jan.31) seconded by 1.1515 (50% Fibo of the September-November drop) and finally 1.1569 (2019 high Jan.9). On the flip side, a breakdown of 1.1446 (100-day SMA) would target 1.1388 (55-day SMA) en route to 1.1323 (200-week SMA).

“Compensation costs for civilian workers increased 0.7 percent, seasonally adjusted, for the 3-month period ending in December 2018,” the U.S. Bureau of Labor Statistics reported on Thursday.

Key takeaways from the press release

• Wages and salaries (which make  up about 70 percent of compensation costs) increased 0.6 percent and benefit costs (which make up the remaining 30 percent of compensation) increased 0.7 percent from September 2018. 
• Compensation costs for civilian workers increased 2.9 percent for the 12-month period ending in December 2018.
• Compensation costs for private industry workers increased 3.0 percent over the year compared with an increase of 2.6 percent in December 2017.

Jane Foley, senior FX strategist at Rabobank, points out that the USD is the worst performing G10 currency over the past 24 hours on the back of a more dovish than expected policy message from the Federal Reserve last night.

Key Quotes

“While a dovish central bank is a currency negative factor, the outlook for the USD crosses must also be seen in the context of the fundamental backdrop for other currencies.”

“The anticipation that policy will be more accommodative than expected going forward has eased fears about declining USD liquidity and lifted risk appetite across the board.  However, parts of Powell’s message were far less market friendly.”

“Powell cited his concerns regarding the risks of a sharp US economic slowdown due to cooling growth in Europe and Asia. He also confirmed that officials were paying close attention to policy-related headwinds from trade disputes and suggests that “these risks are going to be with us for a while”.  These remarks do not describe a backdrop which is conducive to supporting risky assets.  In view of this backdrop we expect that the USD will perform well vs. many Emerging Market currencies this year.”

“Although the Fed’s more dovish tone will limit upside potential for the USD vs. EUR in the coming months, we continue to expect choppy conditions for EUR/USD close to recent ranges as the market reacts to incoming data from both the US and the Eurozone.”

“Real gross domestic product edged down 0.1% in November, partly offsetting an increase of 0.3% in October,” Statistics Canada reported on Thursday.

Key takeaways from the press release

• Decreases in wholesale trade, finance and insurance, manufacturing and construction more than offset gains in 13 of 20 industrial sectors.
• The wholesale trade sector decreased 1.1% in November, more than offsetting October’s growth, as six of the nine subsectors declined.
• The manufacturing sector contracted 0.5% in November, the third decline in four months.
• Retail trade decreased 0.3%, as 5 of 12 subsectors were down, continuing the weakness of recent months.

• The cross alternate gains with losses in the mid-0.8700s.
• UK PM May said the country will leave the EU on March 29.
• ‘No deal’ scenario still ‘on the table’ as negotiations set to continue.

Decent gains in the Sterling are somewhat limiting the upside potential in EUR/GBP so far today, which met moderate resistance in the mid-0.8700s.

EUR/GBP supported near 0.8600

After three consecutive daily advances, the European cross has now returned to the negative territory against the backdrop of the current rebound in the demand for the British Pound.

In fact, GBP is trading on a better mood today, basically on the back of the persistent sell off in the buck following yesterday’s dovish tilt from the FOMC meeting.

Latest news on Brexit noted PM Theresa May has stressed the UK will leave the EU on March 29, all against a vacuum of headlines on the subject so far today.

In Euroland, the Italian economy is seen slipping back into recession in the October-December 2018 period, while the broader economy in the euro bloc is expected to have expanded 0.2% inter-quarter.

EUR/GBP key levels

The cross is now losing 0.06% at 0.8746 and a break below 0.88732 (10-day SMA) would open the door to 0.8655 (monthly low Nov.13 2018) and then 0.8617 (2019 low Jan.25). On the upside, the next resistance emerges at 0.8764 (high Jan.31) followed by 0.8839 (21-day SMA) and finally 0.8862 (high Jan.21).