FX: Lower Expectations Priced In

Even though the ECB kept its key benchmark interest and the deposit rate unchanged, the press conference sent the EUR bid across the board, with the EURIBOR strip trading heavier as participants priced-in lower expectations of expansionary monetary policy. Draghi said that the ECB rate decision was unanimous, implying that no members made a request to cut rates. He also added that the fragmentation is being gradually repaired, and there is significant improvement in the financial markets over the last six months, with strong capital inflows into the Euro zone. The pair also benefited from a buy recommendation by Goldman Sachs and by the closing stages of the week on Friday, the pair was trading with gains of almost 300pips. In terms of technical levels, supports are seen at 1.3200, 1.3172, which is the 38.2% retracement of the 1.2998-1.3280 move and then at the 30-DMA line at 1.3148. On the other hand, resistance levels are seen at 1.3368/85 and then at 1.3486.

GBP/USD
The pair settled the week higher and trended in tandem with EUR/USD after comments by Draghi during the press conference on Thursday buoyed risk sentiment. Of note, just like the ECB, the Bank of England kept its asset-purchase target unchanged at GBP 375bln and also kept interest rates unchanged at 0.50%, as expected. However the release of much weaker than expected Manufacturing and Production reports from the UK capped advance by the pair, underpinned by touted EUR/GBP demand from Middle Eastern accounts which saw the cross hit a nine-month high. In terms of technical levels, supports are seen at 1.6005, 1.5992 and then at 1.5988. On the other hand, resistance levels are seen at 1.6200/55 and then at 1.6275 which is the 30-day upper Bollinger level.

USD/JPY
Broad based JPY weakness was again observed this week and one-month implied vols. extended gains to their highest levels since April after press reports indicated that the Bank of Japan is weighing further monetary easing at its next meeting in January. According to Asahi, the Bank of Japan is reported to be considering increasing the asset-purchase program by JPY 10trl. On that note, Japanese government approved a JPY 10.3trl fiscal stimulus plan which is set to add 2% to Japan's real GDP and create 600,000 extra jobs. In terms of technical levels, supports are seen at 88.48/02 and then at 87.87. On the other hand, resistance levels are seen at 89.35/50 and then at 89.98.