Yen and US Dollar May Rise on CBO Outlook Cut, Draghi Comments

TALKING POINTS – YEN, TRADE WARS, ECB, DRAGHI, CBO, POUND, CARNEY, BREXIT

• Yen may recover further after Friday slump as risk appetite cools

• CBO outlook downgrade, worried Draghi tone may spook markets

• British Pound may rise as BOE officials warn on no-deal Brexit

Currency markets offered mixed cues at the start of the trading week. The sentiment-geared Australian and New Zealand Dollars traded higher amid hopes for a breakthrough in US-China trade talks. The anti-risk Japanese Yen advanced all the same, retracing some of Fridays steep decline. That took looks to have reflected trade war de-escalation prospects.

Bellwether S&P 500 futures now point convincingly lower, suggesting a defensive tone. That may be amplified an annual economic outlook update form the US Congressional Budget Office (CBO) brings a significant downgrade of growth projections while ECB President Mario Draghi echoes worried tone on display after last weeks policy announcement when he speaks in the European Parliament.

The Yen may continue higher against this backdrop while commodity-bloc currencies lose a degree of upward momentum. The US Dollar may likewise trade higher. The benchmark unit has proved to be remarkably resilient amid the market meltdown late last year but suffered losses as sentiment steadied after the calendar turned to 2019. That suggests its role as liquidity haven is at the forefront, at least for now.

BRITISH POUND MAY GET BOOST FROM BANK OF ENGLAND COMMENTS

The British Pound corrected higher, backtracking against all its major counterparts after Friday‘s impressive surge. That move precedes a Parliament vote on a tweaked version of the Brexit withdrawal deal supported by UK Prime Minister Theresa May. As with the first outing, the markets may be hoping that the measure’s likely defeat may delay or even cancel UK/EU divorce proceedings.

This narrative may be reinforced by incoming comments from Bank of England officials, including Governor Mark Carney. They are due to speak at the closing of the central bank‘s Future Forum and may opine on the destabilizing effects of a “no-deal” Brexit outcome. Fire-and-brimstone rhetoric might be seen as encouraging Parliamentary efforts at watering down the split, capping Sterling’s losses.

See our market forecasts to learn what will drive currencies, commodities and stocks in Q1!

ASIA PACIFIC TRADING SESSION

EUROPEAN TRADING SESSION

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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