We stick to our call that EUR/USD will start to lose support once crossing 1.040, as the euro remains broadly unattractive from a macro fundamental perspective and Trump has indicated that the EU should be next on the tariff list. A EUR:USD two-year swap rate gap at -185bp is a mirror of that – via the monetary policy channel – and a key disincentive to chase EUR/USD much higher, ING’s FX analyst Francesco Pesole notes.

EUR/USD to start losing support once crossing 1.040

“Domestically, the eurozone calendar is quite quiet for the remainder of the week. Trade news will dominate in EUR/USD price action, although we’ll be interested to hear whether the slightly hotter-than-expected inflation figures trigger some minor change in the narrative by ECB members. Chief Economist Philip Lane speaks this afternoon.”

“EUR/JPY downside remains interesting. Japanese nominal cash wages accelerated to 4.8% YoY in December, well above the 3.7% consensus. Real earnings were up 0.6% YoY. That reinforces our call for two rate hikes by the Bank of Japan this year and improves the outlook for the yen.”

The Pound Sterling (GBP) could rise further; overbought conditions suggest a sustained break above 1.2530 is unlikely. In the longer run, for the time being, GBP is expected to trade in a range of 1.2245/1.2530, UOB Group’s FX analysts Quek Ser Leang and Peter Chia note.

GBP is expected to trade in a range of 1.2245/1.2530

24-HOUR VIEW: “While we indicated yesterday that “the rapid rise in GBP has scope to extend,” we highlighted that “any advance is unlikely to break clearly above 1.2475.” We added, “the major resistance at 1.2530 is not expected to come under threat.” Our view of GBP advancing was not wrong, even though it rose more than expected to 1.2492. Today, GBP could rise further, but given the overbought conditions, a sustained break above 1.2530 appears unlikely. Support levels are at 1.2450 and 1.2420.”

1-3 WEEKS VIEW: “We highlighted yesterday (04 Feb, spot at 1.2430) that “for the time being, we expect GBP to trade in a range of 1.2245/1.2530.” GBP subsequently rose to 1.2492, and while momentum is beginning to build, it is not sufficient to suggest a sustained advance. In other words, our view remains unchanged for now.”

Australian Dollar (AUD) could break above 0.6265; any further advance is unlikely to reach the major resistance at 0.6310. In the longer run, downward momentum has largely faded; AUD is expected to trade in a range between 0.6080 and 0.6310, UOB Group’s FX analysts Quek Ser Leang and Peter Chia note.

Downward momentum has largely faded

24-HOUR VIEW: “Yesterday, when AUD was at 0.6215, we were of view that it ‘could rise, but any advance is likely part of a higher 0.6155/0.6265 range.’ We were also of the view that AUD ‘is not expected to break clearly above 0.6265.’ AUD then dipped briefly to 0.6171, rose to a high of 0.6262 before closing at 0.6257 (+0.47%). There has been an increase in momentum, and today, a break above 0.6265 will not be surprising. However, overbought conditions suggest any further advance is unlikely to reach the major resistance at 0.6310 (there is another resistance level at 0.6285). To maintain the momentum, AUD must remain above 0.6200 (minor support is at 0.6225).” 1-3 WEEKS VIEW: “Our update from yesterday (04 Feb, spot at 0.6215) still stands. As highlighted, the buildup in downward momentum from Monday “has largely faded.” For now, AUD is expected to trade in a range, probably between 0.6080 and 0.6310.”

The Canadian Dollar (CAD) is reemerging from the tariff scare and is now up 1.5% since Friday’s close. There is a residual 1% risk premium embedded into USD/CAD in our estimation, which suggests some additional room on the downside for the pair if tariff risks are entirely priced out, ING’s FX analyst Francesco Pesole notes.

Risks remain skewed to the 1.45 handle towards the summer

“That said, we are not sure markets will or should move to a completely optimistic stance on the US-Canada trade spat. Even if the worst-case scenario of 25% duties may be averted (although tariffs are only delayed for 30 days), there are no clear hints Canada could be spared in another round of trade-related, and not border-related – universal tariffs.”

“So, if in the short term we can surely see a move to 1.42 in USD/CAD, the risks remain skewed to the 1.45 handle towards the summer.”

New Zealand Dollar (NZD) is likely to trade in a 0.5605/0.5680 range. In the longer run, current price movements are likely part of a 0.5510/0.5705 range trading phase, UOB Group’s FX analysts Quek Ser Leang and Peter Chia note.

Sight increase in upward momentum

24-HOUR VIEW: “Following Monday’s choppy price action, we indicated yesterday that ‘the outlook is unclear after the sharp swings.’ We expected NZD to ‘trade in a range between 0.5570 and 0.5670.’ NZD subsequently traded in a narrower range than expected (0.5583/0.5655). We continue to expect NZD to trade in a range today. However, there has been a slight increase in upward momentum, and this suggests a higher range of 0.5605/0.5680.”

1-3 WEEKS VIEW: “There is not much to add to our update from yesterday (04 Feb, spot at 0.5625). As highlighted, “the current price movements appear to be part of a range trading phase, likely between 0.5510 and 0.5705.”

The US Dollar (USD) has continued to lose ground since the US border deal with Mexico and Canada was agreed on Monday. The focus is now on China, and a relatively measured response by Beijing to Trump’s tariffs is keeping markets optimistic that some deal can be struck before China’s retaliatory tariffs kick in on 10 January. AUD/USD – a key proxy for China sentiment – has entirely erased its short-term risk premium (i.e. undervaluation), ING’s FX analyst Francesco Pesole notes.

Protectionism story remains the key driver

“A consensus US-China deal does seem the most likely scenario, but we sense markets are under-pricing the risk of a more prolonged trade spat. Tariffs on China aren’t as impactful on US consumers/producers as those on Canada and Mexico, and that allows Trump to take his time to discuss a deal. Indeed, Trump has indicated he is in no rush to speak to China’s President Xi Jinping. We suspect the balance of risks for the likes of AUD and NZD – which are pricing in a deal – is skewed to the downside.”

“In other news, markets are treating Trump’s announced intention to take over the Gaza Strip and evacuate Palestinians to neighbouring countries with scepticism. Should we see hints that the US is planning to deploy troops in the Middle East, the market implications can be risk-off, oil-positive and dollar-positive, as Arab nations should firmly oppose the move. For now, the protectionism story remains the key driver, even though US macro news is regaining some centrality.”

“Today, we’ll get ADP employment figures for January, which are expected to come in a bit stronger than December at 150k. Those have not had good predictive power for actual payrolls, but can still move the market. The other important release of the day is the ISM services surveys; the consensus is for consolidation in the main index around 54, although greater scrutiny should be on the price paid subindex, which spiked to 64 in December, sparking inflation concerns.”