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US dollar bouyed by Euro sell-off

By OFX

The US dollar advanced through trade on Thursday buoyed by a Euro sell-off in the wake of the European Central Bank’s policy meeting and surprise renewal of stimulus measures. The dollar index surged through 97 as the worlds base currency rose against the combined unit and the most liquid of FX pairings shifted as investors piled into the USD.

The ECB’s move highlights a shift in global central bank policy thinking and a distinct step away from a tightening bias. Anemic global growth has forced policymakers to reassess policy guidelines and pivot back to accommodative and loose monetary policy programs in a bid to stimulate economic development. This shift has cushioned the fallout from the Federal Reserves move to a neutral policy setting, prompting investors to seek out the USD as a yield still or carry trade play.

With the Fed focus now keenly on domestic data sets attentions turn to Payroll data today for guidance and a window into US economic health. Sustained strength and an uptick in wages could help fuel further USD upside into the weekend.

The Canadian dollar continued the trend of the week and further depreciated against the Greenback. Opening this morning at 1.3450, the Loonie only marginally fell after precipitous falls the previous day, nevertheless the Canadian dollar remains under pressure.

The Canadian dollar now looks to an eventful Friday to close out the week with the full employment change and unemployment rate set for release today. Canada’s southern neighbor is also set to release employment data and the Chairman of the Federal Reserve is scheduled to speak later this evening. Finally, Chinese year-on-year inflation numbers are also due to be reported after hours, closing out what has been an exciting week.

The Euro tumbled through trade on Thursday, falling through 20-month lows after the European Central Bank surprised investors and announced it would re-introduce a new round of quantitative easing and postpone future rate hikes until 2020. While persistent softness across key growth and inflation indicators had forced investors to re-assess expectations for central bank guidance, many investors expected the ECB would refrain from changing its current policy setting until H2 2019.

The EUR/USD fell through critical supports at 1.1250 and 1.12, touching intraday lows at 1.1181 and is now poised for a deeper downward correction. The combined currency could shift toward 1.10 in the coming weeks as the USD maintains risk-off support and the gap between US and German treasury yields widens.

With little of note on today’s domestic docket, we anticipate further reaction to yesterday’s decision. A consolidated move back toward supports could see the Euro steady amid lower short-term ranges while a break toward 1.1150 could spell the start of a deeper downward correction.

The European Central Bank triggered a market reaction yesterday, with some spill over into the GBP. The Sterling dropped against the USD. Opening at 1.3055 this morning, the Pound continues to fall further. It hit a one-week low. Bank of England Monetary Policy Committee Member Silvana Tenreyro has claimed that the BoE is more likely to cut interest rates than raise them in the event of a no-deal Brexit, a situation that is still very much up in the air.

Brexit deadlock continues as we near next week’s series of parliamentary votes scheduled to begin on Tuesday. Attorney General Geoffrey Cox’s ongoing discussions in Brussels over the Irish backstop is yet to achieve anything. The odds of an extension to Article 50 being requested next week continue to grow. The talks are likely to carry on over the weekend with Brexiteer MPs hoping for some reassurance from Cox that the backstop situation will only be temporary despite the EU's unwillingness to change the wording in the agreement. As it stands, the pound has priced in a defeat of Prime Minister Theresa May's plan on Tuesday. GBP/USD is likely to remain range bound or possibly lose some value unless some positive news emanates from Brussels before then. GBP/USD trades around 1.3055 while the GBP/CAD opens today at 1.7565.

The Australian dollar continued its slide overnight, dropping a further 0.2 percent from yesterday’s open of 0.7030. In what has been a turbulent week for the Aussie, a test at the psychological support levels of USD$ 0.70 looks inevitable. Retail sales saw an increase of 0.1 percent after a decline of 0.4 percent in December. The figure still missed market expectations of a lift of 0.3 percent for January and further supports the potential for the first interest rate cut this year since 2016.

Trade Balance figures saw a large surplus with both imports and exports rising. There was a 5 percent boost in exports to $35.9 billion with Gold tripling to $2.2 billion in January.

The AUD/USD tested its lowest levels overnight since the flash crash at the start of January hitting 0.7005. The Australian dollar was dragged lower by a surge in the US dollar overnight as the EUR/USD cross currency pair was hammered following a change in its forward guidance for growth and inflation from the ECB.

The Australian dollar opens this morning at 0.7027 with further direction taken from offshore leads this morning with the release of Non-Farm employment figures in the United States and Chinese inflation figures today.

The New Zealand dollar is slightly weaker this morning when valued against the Greenback, down 0.17 percent in the last 24 hours, reaching a low of 0.6744. Overnight we saw risk-off moves as European, and UK officials are pessimistic about the chances of a breakthrough in Brexit talks. The Euro currency suffered one of its worst days as the ECB significantly cut its growth and inflation forecasts and shifted out the timing of any policy tightening measures.

On the release front today, we saw quarterly Manufacturing Sales which came in at -0.5 percent. Today, the US employment report will be the key focus for the market, which is expected to show robust employment growth. However, job growth didn't meet expectations.

From a technical perspective, the NZD/USD pair is currently trading at 0.6754. We continue to expect support to hold on moves approaching 0.6740 while now any upward push will likely meet resistance around 0.6800.