On Friday, the dollar was in fairly good shape even as the US durable goods orders were mixed, at best. At the same time, the euro was in the defensive as the German IFO business sentiment was reported well below consensus, raising doubts on the pace of the EMU recovery. The trade-weighted dollar tested a first important resistance.
This morning, Asian markets start the week with a risk on sentiment. Chinese equities outperform as Chinese officials gave some optimistic quotes on the Chinese recovery. The dollar is holding within reach of the recent highs against the euro and the yen, but without additional gains yet.
Today, there are only some second tier eco data on the agenda. The US Markit PMI’s and the pending homes sales may have some intra-day impact on USD trading, but they are no game changers. Later this week, the Fed is expected to maintain its rather dovish assessment of policy. However, the (currency) market expect that the US eco data might be strong enough for the Fed to consider further steps of policy normalisation in a not that distant future. For now, this is nothing more than a working hypothesis, but there are tentative signs that global market sentiment is becoming more USD-friendly. The dollar probably won’t ignore good US eco data anymore. Of course, disappointing US eco data might still interrupt this process, but this is not our preferred scenario. On the euro side of the story, we don’t expect the news/data to be strong enough to trigger an autonomous rebound of the single currency. So, we don’t fight the recent up-trend of thedfollar. We also keep an eye at the price action in USD/JPY. Last week, the pair performed fairly well even as US bond yields hardly rose and while US equities lost some momentum at the end of last week.
Geopolitical risk remains a wildcard for trading. Of late, a decline of core bond yields due to global risk-off sentiment often weighed on the dollar. We have the impression that the euro is becoming a bit more sensitive to geopolitical risk, rather than the dollar.
In a longer term perspective, the gradual rise of the dollar against the euro will probably stay intact. Last week, EUR/USD dropped below the 1.3503/1.3477 support even as there was no clear trigger. The move fits our long term view, but we still want a confirmation of the break as the Fed’s soft tone deprived the dollar from extra interest rate support of late. This week’s US eco data will have an important say in this debate. We maintain a sell-on-upticks bias for the EUR/USD cross rate.
No follow-through action on recent sterling correction
Earlier last week, the news flow from the UK was mostly slightly negative for sterling. However, the first reading of the UK Q2 GDP growth interrupted this trend. UK growth maintained a 0.8% Q/Q pace, leading to a 3.1% Y/Y growth.
The figure was exactly in line with the consensus, but the report provided some comfort for sterling bulls. A quarterly growth rate of 0.8% will further reduce spare capacity in the UK economy. The BoE will have to take this into account in its inflation report which will be available at the August meeting. The reaction of the major sterling cross rates to the UK GDP release was guarded. EUR/GBP drifted gradually south to the low 0.79 area. Cable basically held a sideways trading pattern in the 1.6965/1.7000 area. So sterling resisted the overall USD strength quite well. Even so, the pair remained below the 1.70 barrier.
Today, there are again no important data on the agenda in the UK and the UK calendar is also relatively thin later this week. The UK manufacturing PMI (on Friday) is the exception to the rule. So, global factors like the overall performance of the dollar will also affect the major sterling cross rates.
EUR/USD staying on a downside trajectory will probably cap the topside in EUR/GBP, too. For cable, the picture is becoming a bit more fragile. Further USD gains might weight on cable too.
Recently, EUR/GBP stayed near the cycle lows and it even set a minor new low earlier last week. The UK news has been a bit more mixed recently but the damage on sterling was still rather contained. Short-term, there might still be room for some consolidation of sterling against the euro. Even so, overall euro weakness may hamper a substantial rebound of sterling against the euro. So, there is no reason to go against the trend. We maintain our LT bullish view on sterling with EUR/GBP 0.7755 as a target. However, to set-up new long sterling positions we maintain a sell-on-upticks tactic for EUR/GBP.
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.
Recommended Content
Editors’ Picks
AUD/USD stays directed toward 0.6500 as RBA's Bullock speaks
AUD/USD is extending losses toward 0.6500 in Asian trading on Tuesday. The Aussie Dollar remains offered after the Reserve Bank of Australia extended the pause. Markets digest the less hawkish policy statement while Governor Bullock's press conference gets underway.
USD/JPY recaptures 150.00 after the expected BoJ rate hike
USD/JPY extends gains to regain 150.00, as the Japanese Yen stays vulnerable amid a classic 'sell the fact' trading on the hawkish BoJ decision. The BoJ lifted the interest rate by 10 basis points (bps) from -0.1% to 0% for the first time since 2007 and abandoned the YCC framework.
Gold price hangs near one-week low, looks to Fed decision on Wednesday for fresh impetus
Gold price struggles to capitalize on the previous day's bounce from the $2,145 region and oscillates in a range during the Asian session on Tuesday. Hawkish Fed expectations, elevated US bond yields and a bullish USD cap the upside.
Bitcoin price shows weakness, but new BTC whales have created solid support at $56,400
Bitcoin price downside momentum continues to gain strength, giving sidelined and late bulls a chance to buy the dip. The market remains focussed on the oncoming halving, expected to kick off the next bull cycle.
Lots of tension ahead of this week's Fed decision
Last week, we got a strong round of US economic data accompanied by hotter US inflation reads. The takeaway of course is that there might be a lot more pressure on the Fed to be looking to scale back its rate cut outlook at this week’s meeting.