Key Points
- Fed Chair Transition: President Donald Trump has nominated Kevin Warsh to succeed Jerome Powell in May. Some analysts view this as a dollar-positive move.
- Japan’s General Election (February 8): It will be essential to keep an eye on Japan’s early election on February 8, as it could translate to volatility early in the month for the country’s currency.
- Joint FX Intervention Threat: There are concerns over a possible joint U.S.-Japan intervention to stabilize the yen.
US Dollar (USD)
The U.S. dollar hit a four-year low last week, as investors and traders continue to show concerns about the state of “U.S. exceptionalism”. The political climate in the country, alongside other geopolitical uncertainties, has led investors to favour precious metals and other safe havens in recent weeks.
However, the currency managed a slight recovery toward the end of the month, aided by the nomination of Kevin Warsh. ING analysts suggest that while the DXY is hovering at multi-quarter lows, February is historically a seasonally positive month for the dollar.
The “Warsh factor” is expected to act as a buffer against a deeper dive, as his profile allows markets to price out some of the more dovish risks associated with other potential nominees. Despite this, the USD remains vulnerable.
Key Levels
- EUR/USD: Higher – 1.2080, Lower – 1.1540
- GBP/USD: Higher – 1.3800, Lower – 1.3500
- USD/JPY: Higher – 159.00, Lower – 151.00
Euro (EUR)
The euro’s recent rally, which saw it briefly climb above 1.200, has reportedly sparked a debate within the European Central Bank, with some said to have expressed concerns that a strong currency could see the ECB missing its inflation target to the downside.
ING notes that the traditional correlation between EURUSD and short-term rate differentials has “virtually disappeared,” making the pair more sensitive to technical levels and dollar-side weakness.
A break above the 1.208 high seen in late January could trigger further upside volatility, but analysts remain skeptical of a sustained move toward 1.22 in the immediate first quarter.
Key Levels
- EUR/USD: Higher – 1.2080, Lower – 1.1540
- EUR/GBP: Higher – 0.8750, Lower – 0.8550
British Pound (GBP)
Sterling performed strongly in January, closing up 1.6% at 1.3682, despite the dollar strengthening on the final day of the month.
This outperformance was attributed to both the weakness in the U.S. dollar and to a “short squeeze” as asset managers were caught underweight the Pound during the late-January dollar sell-off.
ING analysts warn, however, that the high 1.36s or low 1.37s may represent the ceiling for the GBP in the current quarter.
Key Levels
- GBP/USD: Higher – 1.3800, Lower – 1.3500
- EUR/GBP: Higher – 0.8750, Lower – 0.8550
Japanese Yen (JPY)
The Yen’s direction is somewhat uncertain, though volatility in the first part of February is likely as the country prepares for the February 8 general election.
Prime Minister Takaichi has staked her premiership on regaining a majority, and the outcome will likely move the JPY significantly.
“For USD/JPY, investors will be wary of a repeat of the 10-12% drop seen in the summer of 2024,” ING analysts said in a recent note. “Failure of the LDP to gain a majority at the 8 February election or prospects of a much earlier Bank of Japan rate hike could add momentum to such a move.”
Meanwhile, there has been talk of intervention in the JPY, with some reports stating that the U.S. and Japan could conduct a joint operation, which may weigh heavily on market psychology in February.
Key Levels
- USD/JPY: Higher – 159.00, Lower – 151.00
- EUR/JPY: Higher – 185.60, Lower – 181.50
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