Yesterday, major USD cross rates broadly stabilized until the US Q2 GDP report, when it gained track. A stronger than expected US Q2 GDP sent US bond yields and the USD higher. EUR/USD dropped well below the 1.34 mark. The Fed acknowledged the improvement in the labour market and saw risks of inflation remaining persistently below 2% declining. At the same, the Fed indicated that there remains significant underutilization in labour market resources. The dollar returned a few ticks after the Fed policy decision, but the in daily perspective the US currency still recorded nice gains against the euro and the yen. EUR/USD closed below the 1.34 mark. USD/JPY tested the 103 big figure. The trade-weighted dollar is testing the key 81.50 area. The countdown to tomorrow’s US payrolls report has started.

Overnight, Asian equities are narrowly mixed. USD/JPY is off yesterday’s reaction top, but the test of the 102.80/103.02 resistance (previous tops) is ongoing. Similar picture for EUR/USD. The pair has found a new short-term equilibrium just below the 1.34 mark.

Later today, global markets might be in an interlude between yesterday’s events and tomorrow’s key US payrolls and ISM reports. Even so, in the EMU, markets will look out for the EMU July inflation and the June labour market data. The focus for currency trading will be on EMU inflation. The consensus stands at 0.5%M Y/Y, but we still see downside risks (see Rates part). If so, it would be a negative for the euro as the contrast with the US situation will caught the eye. Indeed, the Fed sees declining risks for inflation running persistently below 2% and current inflation is about 2%. In the US, the employment cost index, the jobless claims and the Chicago PMI are scheduled for release. A guarded reaction is likely ahead of the payrolls. Even so, in the wake of a more optimistic Fed assessment, will dollar markets be more sensitive for strong US eco data. The downside of the dollar should now be well protected as the US currency is gaining interest rate support. Only a substantial negative surprise from the payrolls and/or the US ISM will be able to trigger a protracted setback of the dollar. We keep a buy USD on dips approach for USD/JPY and for USD/EUR. Geopolitical issues remain a wildcard, but the data should prevail.

In a longer term perspective, the gradual rise of the dollar against the euro will stay intact. Last week, EUR/USD dropped below the 1.3503/1.3477 support even without a clear trigger. The move fits our long term view and the pair stayed well below this level over the previous days. Even so, we stayed a bit cautious and looked out whether the recent strength of the dollar will ‘survive’ the Fed policy announcement and the key US data that will be published this week. After yesterday’s events quite a poor payrolls report is needed to undo the break below the 1.3503/1.3477 support. This is not our preferred scenario. A more pronounced correction is still an opportunity to add EUR/USD short exposure. The EUR/USD downtrend remains intact as long as the pair holds below the 1.3651/1.3700 area, while 1.3296 is the next short-term target, with the 2013 September low at 1.3105.


Cable extending trip south

Yesterday there was hardly any news from the UK to guide sterling trading. Cable remained under pressure due to the overall rise of the dollar after a stronger than expected US Q1 GDP. The pair even filled bids below the 1.69 figure, but regained some ground after the Fed policy announcement. However this was a pure USD move. Cable and EUR/USD moved almost perfectly in lockstep. So, EUR/GBP continued to trade in familiar territory in the low 0.79’s.

Overnight, the GFK consumer confidence dropped from 1 to -2, while a small rise to +2 was expected. Nationwide house prices showed a slowdown in price rises (0.1% M/M and 10.6% Y/Y; vs 1.0% M/M and 11.8% Y/Y in June). For now, there is hardly any reaction in the sterling cross rates.

In an interview, BoE’s Broadband indicated that the ‘edge is coming off the UK housing market’ and that this might affect the wider economy later this year. At the same time, he acknowledged that near term indicators stay quite strong.

Later today, there are no important eco data on the UK agenda. So trading in EUR/GBP and in cable will still be driven by the performance of the euro and the dollar. A (too) low EMU inflation figure might keep the euro under pressure. Overall USD strength is weighing on cable even as the rally of the dollar can take a breather after yesterday’s strong gains. We expect EUR/GBP to hold near the 0.79 pivot. The upside remains well protected.

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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