Yesterday, the dollar succeeded some follow‐through gains in the wake of Yellen’s comments Tuesday evening. The US currency was especially in good shape against the euro. The gains against the yen were limited. Trading was mostly technical in nature and US eco data were too close to expectations to have an important say on USD trading.

This morning, Asian equities fail to join the record race from the Dow yesterday evening. The US and Europe announcing additional sanctions against Russia might be a reason for the cautiousness of Asian investors. Concerns on corporate credit quality (potential bond default in China) might play a role, too. On the currency market, the strength of the yen, especially against the euro, is catching the eye. The pair finally dropped below the 137.50 support. This is in the 1st place due to euro weakness (EUR/USD dropped to the 1.3520 area). However, this yen strength might also be an indication of underlying investor caution. USD/JPY dropped back to the 101.50 area. Something to keep an eye on. Later today, the calendar is again very thin in Europe. In the US, the initial jobless claims, the housing starts and building permits and the Philly Fed Business outlook will be published. The data are interesting, but probably no game‐changer for currencies. Markets might give some more attention to the housing data as Fed Yellen elaborated on the incomplete/disappointing recovery of the US housing market in her appearance before Congress. We see risks for a positive surprise. In theory, this might be a further supportive for the dollar. However, off late the dollar performance was a bit ambiguous.

The dollar gained substantially ground against the euro since Yellen’s appearance before the Senate. At the same time, the gains in USD/JPY are meagre. So, more global factors might be in play. We also keep a close eye on equities and global sentiment on risk. Equities in Europe and the US had a strong run yesterday. At the same time, the yen remains fairly strong. This is a bit strange/contradictory. Will there be a repositioning in one way or another? Whatever the explanation, we have the impression that the decline in EUR/JPY is a factor of importance behind the decline in EUR/USD to. A deterioration in sentiment on risk might reinforce this move. EUR/USD is gradually nearing the 1.3503/1.3477 support area. For now, we don’t see a clear trigger for EUR/USD to break this important support. Even so, the downside momentum of EUR/USD and EUR/JPY clearly strengthened of late. So there is no reason to row against the tide.

Recently, we had a neutral bias on EUR/USD short‐term. In a longer term perspective, the gradual rise of the dollar against the euro will probably stay intact. However, short‐term we didn’t see a trigger for EUR/USD to break below the 1.3503/1.3477 support. The Fed’s soft tone deprives the dollar from further interest rate support. Even strong US payrolls and/or the mini‐crisis on Portugal were unable to push EUR/USD out of the sideways consolidation pattern confined by the range bottom at 1.3477/1.3503 and the 1.3734 range top. Until now, a cautious sentiment on risk was at least as negative for the dollar than for the euro, but over the recent days, we had the impression that this pattern might gradually change. Something to look out for. USD/JPY recently drifted lower in the 100.75/102.80 trading range. The picture remains fragile, but a real test of the bottom didn’t occur yet.


EUR/GBP sets new cycle low below 0.79

Yesterday, the focus of sterling traders was on the UK labour market data. Sterling rebounded sharply against the euro on Tuesday on higher than expected UK inflation data. The gains against the dollar were less outspoken as the US currency found a better bid during the Fed’s Yellen hearing. The UK labour data gave again a mixed picture. The unemployment rate declined further from 6.6% to 6.5%, jobless claims declined and employment growth was strong. However earnings growth, a key feature for BoE policy, disappointed again. Sterling lost temporary some ground after the publication of the UK data, but EUR/GBP finally dropped back to the 0.79 area. Cable basically was on very gradual intraday downtrend mirroring part of the gains of the dollar against the euro.

Later today, there are no UK eco data releases. Technical considerations might prevail for sterling trading. Sterling had a strong run against the euro over the previous days and some consolidation might be on the cards. However, the downside momentum in EUR/USD probably keeps to topside in EUR/GBP well protected. For cable we expect more sideways trading in the low 1.71area.

Recently, EUR/GBP stayed within reach of the cycle lows, but the decline slowed. The UK news was a bit more mixed and the negative headlines from Europe had no big negative impact on the single currency. However, Tuesday’s jump in UK inflation and the decline of EUR/USD post Yellen, brought sterling back to the recent highs against the euro and the dollar. The standing EUR/GBP downtrend remains intact and the day‐to‐day momentum turned again sterling positive after the UK inflation report. We maintain a sell‐onupticks bias.

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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