USD/JPY dropped back to the 102.50 area

USD rebound slows

The focus on global markets was on equities as M&A stories triggered a new upleg of US and European equities. The direct impact from the equity rally on interest rates and equities was limited. Bond yields moved temporary higher early in the US. This gave the dollar brief support. However, at the end of the day, the moves in EUR/USD and USD/JPY were negligible.

Overnight, Asian equities are mixed and don’t join the rally in Europe and the US yesterday. The Chinese manufacturing PMI rebounded slightly from 48.00 to 48.30, in line with expectations. Even so, uncertainty on the health of the Chinese economy persists. There is no clear trend in the major currency cross rates this morning. EUR/USD is gaining a few ticks in the low 1.38 area. USD/JPY dropped back to the 102.50 area. Lower than expected Q1 inflation data in Australia pushed expectations for a rate hike further out in time. The Aussie dollar was hit hard. AUS/USD dropped a full figure from the 0.8375 area to 0.8275 at the moment of writing. Today, we look out for the advance reading of the EMU PMI. A stabilisation around 53.00 is expected for the composite PMI. A better than expected figure is in theory supportive for the euro. However, only a big upward surprise will change the debate on the need for more easing from the ECB to prevent inflation to stay low for too long. We don’t expect the figure to trigger a sustained rebound of the euro. In the US, the calendar is again thin with only the Markit PMI and the new home sales on the agenda. We expect those data series to be only of intraday significance for USD trading.
Yesterday, the dollar profited slightly from a temporary rise in US bond yields, but both bond yields and the dollar returned gains later in the session. This morning, sentiment on the equity markets is less buoyant than was the case yesterday. So, the dollar probably won’t get additional support from higher core yields. Ukraine remains in the headlines but markets currently don’t see it as a relevant factor for (currency) trading on global markets.

Of late, we advocated that it will be difficult for EUR/USD to rally sustainably beyond 1.40. This working hypothesis came under stress, but is still valid. The 1.3906/67 area looks like a tough resistance. To be honest, the negative impact of Ukraine on the euro was limited. Caution remains warranted, but a guarded sell-on-upticks strategy can be reconsidered. USD/JPY is off the recent low. For sustained further gains of the dollar (both against the euro and the yen), the US currency needs more interest rate support. In this respect, the recent core bond market movements weren’t dollar supportive. However, at the end of last week, there were cautious indications of US bond yields bottoming out.

Cable nearing its cycle top

On Tuesday, there were no important eco data in the UK, keeping trading in the major sterling cross rates technical in nature. Even so, underlying sterling sentiment remained constructive. Cable returned close to the 1.6642 top set last week. EUR/GBP was blocked in a narrow range in the low 0.82 area.
Headlines on large M&A deals involving UK corporates were slightly positive for sterling. EUR/GBP filled bids in the 0.8200 area, but a break didn’t occur.

Overnight, cable is again nearing the 1.6842 top, as the dollar is losing slightly ground across the board. EUR/GBP is changing hands in the 0.8210 area, little changed from yesterday.

Later today, the monthly UK budget data for March and the CBI total trends orders will be published. The data are interesting, but a big deviation from consensus is to have a substantial impact on sterling trading. Markets will also keep a close eye on the minutes from the April BoE meeting. The BoE will probably again mention the denting impact from the strength of sterling on inflation. On the other hand, we look out what the BoE says on the spare capacity that is left in the UK economy. The comments from the BoE may be slightly dovish and a temporary negative for sterling. However, the downside in sterling remains well protected as long as the eco data remain strong. M&A activity/speculation may continue to put a floor for sterling, too.

Of late, the technical picture in the major sterling cross rates was mixed. Cable recently rebounded off the 1.6460 low and the pair set a new minor cyclical top north of 1.6823. We maintain our view that a sustainable break of the 1.6823/42 area won’t be easy. EUR/GBP was under (moderate) pressure at the end of last week and drifted lower in the 0.82 big figure. The sterling momentum is constructive, but a sustained break below the 0.8200/0.8157 support will be difficult without high profile news from the UK or Europe. We keep a sell-on-upticks bias for EUR/GBP.