USD: Dollar Off Best Levels as Fed Developments Lean Dovish at Margin

• EGBs closed lower across the curve, led by a sizeable sell-off in Bunds at the open on the back of higher defense spending expectations in the event of a US-brokered peace deal between Russia and Ukraine.
• Those moves mainly held for German paper, keeping to a narrow range as 10Y yields didn't want to retreat too far after an unsuccessful attempt to push above 2.50%.
• Other major EGBs saw a greater paring of those early losses however, with spreads more than reversing Friday’s widening with support from the EuroStoxx 50 climbing 0.5%.
• BTP-Bund spreads saw the most notable tightening, to 105.8bps (-3.2bp) and close to Thursday’s 105.5bp that marked fresh recent lows.
• Germany 2Y +2.3bps & 10Y +5.7bps, France 2Y +1.2bps & 10Y +3.8bps and Italy 2Y -0.4bps & 10Y +2.6bps.
• Swap spreads: Long-end German ASWs meanwhile have more than reversed Friday’s widening, with the Bund ASW vs. 3-month Euribor 4bp tighter and the Buxl ASW 4.5bp tighter.
• The prospect of debt brake reform following the election result (the probability of which depends on the eventual composition of the Bundestag) presents a key near-term risk to ASWs, even if the implementation of any reforms would likely take some time.
• We pencil in a 30-year Bund syndication for this week but our conviction is increasingly waning ahead of the election.
• ECB speak has seen pre-eminent hawk Holzmann viewing “some” probability of a March rate cut, sufficiently loose compared to the 98% of a 25bp cut priced to have seen Germany 2Y yields rise 1bp post-comments.   
• Bundesbank’s Nagel meanwhile noted a tariff scenario where the level of German GDP would be circa 1.5pps lower by 2027.
• ECB Executive Board Member Cipollone will peak on the ECB's balance sheet at an MNI Event tomorrow at 1400GMT/1500CET (sign up here). 

• RES 4: 1.0630 High Dec 6   
• RES 3: 1.0594 Dec 9 ‘24
• RES 2: 1.0533 High Jan 27 and a reversal trigger
• RES 1: 1.0514 High Feb 14
• PRICE: 1.0481 @ 15:41 GMT Feb 17
• SUP 1: 1.0393 20-day EMA
• SUP 2: 1.0280/0141 Low Feb 10 / 3 and the bear trigger
• SUP 3: 1.0138 1.764 proj of the Sep 25 - Oct 23 - Nov 5 price swing
• SUP 4: 1.0031 2.00 proj of the Sep 25 - Oct 23 - Nov 5 price swing

EURUSD is holding on to its recent gains. A short-term bull theme remains intact and last week’s gains have reinforced current conditions. The move higher also strengthens a short-term reversal signal on Feb 3 - a hammer - and suggests scope for an extension near-term. The pair has breached the 50-day EMA, at 1.0430. This has exposed 1.0533, the Jan 27 high. Initial firm support lies at 1.0280, the Feb 10 low.   

USDCHF exhibited sharp weakness late last week, as greenback sentiment was driven by softer US PPI details & weak retail sales data, and the Swiss Franc was bolstered by stronger-than expected January core CPI figures. USDCHF has been consolidating the break of its 50-day EMA, an average that provided significant support since the US election.

• Swiss Q4 GDP growth came in above expectations this morning, bolstering the renewed CHF optimism, alongside indications that long USDCHF positions have recently been trimmed, according to latest CFTC data.
• Broader dollar optimism has been waning in recent sessions, with tariff announcements being viewed rather as a negotiating tool and potentially questioning the pre-election pledges of the Trump administration. Furthermore, Ukraine peace talks starting to take shape have helped major equity indices maintain their elevated levels, providing an additional headwind for the USD.
• The bearish threat for USDCHF remains evident, and further weakness would initially target 0.8965, the January low. A break would open a cluster of lows around 0.8920 seen last December. Initial resistance is now seen at 0.9065, the 20-day EMA.