EUR/USD rebounds as (US) equities extend decline

Yesterday, USD traders had to look for a new driver as the ECB policy meeting and the payrolls were out of the way. Sentiment on global equity markets remained risk-off as European and Asian markets joined the US correction on Friday. USD/JPY drifted further south. The dollar also lost some ground against the euro, even as sentiment on risk remained risk-off. ECB policy makers confirmed their commitment to take action if inflation stays too low for too long, but this action probably won’t come in the very near future.

Overnight, the reaction on Asian markets is similar to yesterday. Japanese equities join the correction in the US as USD/JPY dropped below the 103 mark. The losses in other Asian markets are contained. China outperforms again and records decent gains. The BOJ left its policy unchanged. BOJ governor Kuroda will give a press conference at 08.30 CET. The dollar remains also under slight pressure against the euro. Later today, there are again few eco data on the agenda in the US and in Europe. The NFIB small business confidence in the US is expected to rebound from 91.4 to 92.5 after last month’s setback. However, it is unlikely that this indicator will change fortunes on global markets and on the currency market in particular. Markets will continue to look out for comments from the ECB and the Fed on monetary policy.
Sentiment will probably remain risk-off at the start of trading in Europe. Yesterday, the correction on the equity markets was no negative for the euro. The (limited) intraday decline in core/US bond yields hit the dollar harder than the euro. Overall, the reaction on the currency markets was again moderate given what happened on the equity markets. Ukraine remains a wildcard for European assets. The tensions in the east of the country are again building but it is not clear whether this will already be a factor of importance for trading on European markets. For now, the negative impact on the euro is limited, but it won’t be a help. Yesterday, EUR/USD extended its post-payrolls rebound as the market had hoped for a big rise in US payrolls. This ST repositioning should be worked out by now. There is no hurry to rush in to add EUR/USD shorts at the current level, but we still assume that the upside of EUR/USD remains tough.

From a technical point of view, the picture for the dollar is mixed. The rebound in USD/JPY (and in EUR/JPY) has run into resistance. For now, the correction in USD/JPY remains limited. Even so, USD/JPY is driven by conflicting factors (equity performance, core bond yields, BOJ policy expectations). The correction suggests that a clear break of 105.44 is no done deal yet. The picture of the dollar against the euro is different. A gradual rebound of the dollar looks in place, even after yesterday’s correction. 1.3643 is key short-term. A break below this level would open the way for a retest of the year low at 1.3477.

Sterling stays in short-term consolidation modus

On Monday, there were again no important UK eco data to guide the price action in sterling trading. The dollar was under moderate pressure across the board, helping cable to regain the 1.66 barrier late in Europe. In this dollar move, EUR/USD initially slightly outperformed cable, as the euro recouped part of last week’s losses and as some ECB policy makers suggested that unconventional measures are possible, but still some distance away. EUR/GBP closed the session at 0.8274, compared to 0.8268 at Friday’s close.

Overnight, EUR/GBP is marginally lower. Cable is holding with reach of yesterday’s top, hovering in the 1.6610/20 area.

Later today, the UK February production data and the NIESR March GDP estimate in the UK will be published. A moderate growth in production of 0.2%/0.3% is expected. So, the consensus expectations are not exceptionally high. A positive surprise should in theory support sterling, as underlying sentiment on the UK currency is already fairly constructive. However, in the current risk-off environment, it is unsure whether there is much appetite to react to positive news. So, any (positive) reaction will probably be muted. Global uncertainty might keep EUR/GBP near the recent levels short-term. .

The technical picture in the major sterling cross rates remains a bit ambiguous. The downside in cable looked fragile in case of a broad-based rebound of the dollar. However, sterling recently tried to rebound off 1.6460 low. In a longer term perspective we maintain the view that both the broader picture and the UK economic and monetary situation.