USD rebound (temporary?) interrupted

Yesterday, the cautious rebound of the dollar already ran into resistance. The equity rally stalled and the dollar didn’t get any further interest rate support. USD/JPY dropped temporary to the 102.20 area. EUR/USD was again better bid and returned to mid-1.38 area. The move was partly due to dollar weakness, but the euro was supported by a strong EMU PMI, too. Even so, the daily changes in both EUR/USD and USD/JPY were again quite limited. There is still no directional trend.

Overnight, Asian equities are mostly in negative territory. However, US equity futures suggest a rebound after yesterday’s losses. So, sentiment on risk might be good in Europe and the US later today. If this would translate into higher bond yields, it might be a positive for USD/JPY and for the dollar in general.
However, there is still no obvious driver for trading in the major dollar cross rates this morning. The Reserve bank of New Zealand as expected raised its policy rate from 2.75% to 3.0%. The Kiwi gained further ground as the RBNZ was optimistic on growth.

Today, the European and US calendars are interesting. In Europe, markets will look out whether the German IFO business climate confirms the strong PMI report published yesterday. However, we see downside risks for the IFO, which would be a negative for the euro. The US durable orders are expected reasonably strong at 2.0% M/M growth. For the claims, we see risks for a higher (worse) than expected figure. Even so, the context does look good for the dollar. The speech from Mr. Draghi in Amsterdam is a wildcard. If he says anything on monetary policy or on the euro, it will probably be dovish. However, it is unlikely he will be able to convince markets that policy easing will occur in the near term

Of late, we said it would 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 is a tough resistance. 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. We look out whether this will remain the case and lead to higher yields further out.

Sterling corrects slightly lower

On Wednesday, sterling traders focused on the Minutes of the BoE meeting.
However, the report didn’t provide much news on the timing of policy tightening. BoE members had different views on the size of the slack in the economy. Remarkably, the BoE didn’t devote much attention to the strength of sterling. EUR/GBP found a better bid after the stronger than expected EMU PMI. Cable drifted lower as a break of the cycle top at 1.6842 failed. A mixed CBI orders report didn’t help sterling. Sterling closed the session moderately lower against the euro and the dollar.

Today, CBI distributive trades report is on the agenda. A rebound from 13 to 17 is expected after last month’s setback. A positive surprise is possible. The report is timelier than the ONS retail sales that will be published tomorrow, but the (currency) market usually reacts more to the ONS report. For EUR/GBP, the euro side of the story might be important, too, with the German IFO for release and, even more important, a speech of ECB’s Draghi. If Draghi addresses current monetary policy, he will probably be dovish. However, it will be difficult to convince markets that decisive action will be implemented in the near future. We think that the topside in EUR/GBP is rather well protected.

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. While the sterling momentum is constructive, 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.