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Risk-off sentiment  boosts the euro at the very wake of 2016, but this is only the beginning of a year that may, well, repeat itself. Here are  some thoughts from Barclays:

Here is their view, courtesy of eFXnews:

The FX market will likely start 2016 with a strong sense of deja vu, as many themes from last year remain firmly in place, notes Barclays Capital.

“Most notable are the monetary policy divergence led by the Fed, lower commodity prices and the role of a weaker China/EM in the global recovery. 2016 will also have a return of UK political risk, this time in the form of the EU referendum, and geopolitical risk centred (again) on Russia and the Middle East,” Barclays adds.

EUR/USD: Volume set to rise this week.

“FX market liquidity dropped materially into year-end, with average daily EURUSD volumes about 1/3 of their 2015 average according to our VolT data. Our data also suggest, however, that activity will increase markedly this week, with daily EURUSD volume usually 10-20% higher than average in the first week of the year,” Barclays notes.

On this week’s data front, Barclays thinks that they are likely to ensure these issues remain in focus and support their view of further USD strength, particularly against the EUR.

USD: NFP to set the pace of the normalization cycle.

The USD will likely find support in Friday’s NFP report. Average job creation of 150k or more during the next few employment reports should be consistent with a gradual increase in the fed funds rate.

Therefore, taking into account our expectations of a creation of 225k jobs in December (consensus: 200k), we think the USD will outperform and the Fed will be comfortable delivering another 25bp hike in H1, followed by an additional 50bp of hikes in H2 this year. Currently, fed funds price in only about 10bp for March and 50-60bp over the next year

The USD has generally weakened over the holiday period, with G-10 high-beta currencies outperforming as equity markets and commodity prices gained into year-end. However, rising implied FX volatility has created a more difficult environment for EM currencies over the past two weeks,” Barclays projects.

EUR: Low inflation to encourage expectations of further ECB action.  

Euro area headline and core December inflation (Tuesday) will be the focus for the EUR, we expect both to increase slightly, to 0.4% y/y (last: 0.2%) and 1.0% y/y (last: 0.9%), respectively, but remain well short of the ECB’s objective of achieving annual inflation below, but close to, 2%.

We continue to believe the ECB’s December meeting rhetorical misfire and subsequent EUR REER appreciation of more than 3% come at a longer-term cost to the EUR. With core inflation and market measures of inflation expectations remaining extremely low (the EA 5-year forward, 5-year break-even inflation rate is currently below 1.7%, versus above 1.8% in early December), longer or greater policy accommodation is likely to weigh heavily on the EUR this year,” Barclays argues.

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