Dollar stays under pressure

Yesterday, global (equity) markets started the session again in risk-off mode. The dollar was a prominent victim of this ‘soft’ market context. USD/JPY declined below 102. The dollar lost also ground against the euro. Of late, it was not unusual for the dollar to come under some pressure globally when core bond yields declined due to risk-off sentiment. However, US yields barely declined yesterday, even if there was a late session rally on the US bond markets late in the session. Even so, EUR/USD was squeezed higher to the 1.38 area.

Overnight, Asian equity markets show moderate gains. Japan continues to underperform. The recent strength of the yen and de decline of the Japanese equities continue to reinforce each other. Even so, the decline of USD/JPY shifts apparently into a lower gear. The pair returns to the 102 area, after a late session spike lower yesterday evening (in line with a decline in US bond yields). EUR/USD is holding near the 1.38 pivot
Today, there are again no important eco data in the US and Europe. After the close of the European markets, the Fed will publish the minutes from the March policy meeting. During the session markets will continue to look out for comments from the ECB and the Fed on monetary policy.
Yesterday, ECB comments gave again mixed signals on the need for more policy stimulation. German sources (Weidmann/Buba) indicated that the ECB is prepared to take action if needed, but the risk of deflation in Europe is low.
French comments put other accents. France’s Noyer took the same line, but mentioned that it be would helpful if the euro would be a bit weaker. The new French Prime Minister, Valls, also criticized the ECB policy and the strength of the euro.

Today, ECB’s Coeure might repeat the French plea for a weaker euro when speaking at the IMF conference. However, this call probably won’t change the market perception that further ECB easing, if any, is probably not around the corner. The effect from Draghi’s QE remarks last week on the euro is probably already worked out. In this context, a decline in EUR/USD will probably have to come from a rebound of the dollar, rather than from a decline of the euro.

Friday’s payrolls were not strong enough to support a market that was apparently positioned long USD, hoping for an even stronger payrolls report. At the same time, the dollar needs interest rate support, which it doesn’t get in case of a risk off correction. So, for now, the short-term picture for the dollar looks mixed, at best. We keep an eye at the Minutes of the march Fed meeting. Was there any internal debate on the timing of the first rate hike (cf. quote Yellen that interest rates could be raised six month after finishing the bond buying programme)?. From a technical point of view, yesterday’s correction didn’t break any key technical level. 1.3820 is the first short-term resistance. Even so, the price action doesn’t give comfort for USD.

Sterling propelled by strong production data

On Tuesday, the news flow on the UK was unequivocally positive for sterling. The UK February Industrial and manufacturing production showed monthly growth of 0.9% and 1.0% M/M respectively while only a 0.3% growth was expected. The monthly NIESR GDP estimated was reported at a strong 0.9% for March and the IMF revised the 2014 UK growth prospects upward. Especially the strong production data suggested that the UK economy might fill the output gap sooner than expected by the BoE. Cable jumped above the 1.67 barrier after the publication of the production report. EUR/GBP dropped to the 0.8235/45 area even as the euro was well bid, too.

Overnight, the UK BRC shop prices dropped further from -1.4% Y/Y to -1.7% Y/Y. Even so, sterling remains well bid. EUR/GBP is again testing yesterday’s lows. Cable is near the recent high in the 1.6750 area.

Later today, the UK February trade balance will be published. The consensus expects a slightly lower deficit (after a substantial negative surprise the previous month). Of late, the UK trade data often were the weak spot in the UK recovery story. We don’t have much evidence to distance ourselves from the consensus. Probably quite a big negative surprise is needed to derail to current sterling positive sentiment.

Of late, the technical picture in the major sterling cross rates was mixed, but yesterday’s rebound brings sterling within reach of important resistance. Cable recently rebounded off the 1.6460 low and the 1.6823 cyclical top comes again within reach. For now, we maintain the view this top won’t be easy to break, but broad dollar weakness might spoil the game. EUR/GBP is nearing the 0.8200/0.8157 support area. The sterling momentum is constructive, but a break will probably be difficult as long as the euro remains well bid across the board.