USD in wait-and-see modus ahead of ECB-QE/payrolls

On Monday, EUR/USD hovered up and down in the high 1.11/low 1.12 area. Trading was mostly technical in nature. The downside in EUR/USD looked a bit exhausted and Europe data provided some support, too. Later in the session, the dollar was better bid overall even as the US data were mixed. A positive equity sentiment in the US and higher US bond yield finally helped the dollar. EUR/USD reversed the earlier gains and closed the session at 1.1184 (from 1.1196). USD/JPY (temporary) regained the 1.20 mark.

Overnight, Asian equities traded mixed to slightly lower as they fail to join the record race of equities in the US. The PBOC again fixed the USD/CNY reference rate higher, weakening the yuan further after this weekend’s rate cut. USD/JPY is off the 120+ levels as an adviser of PM Abe in a WSJ interview said that USD/JPY might be at the upper limited of its comfort zone. The quotes illustrate the recent debate in Japan on the effectiveness of more yen weakness. The dollar is marginally lower against the euro. EUR/USD is trading in 1.12 area.
The Reserve Bank of Australia left its policy rate unexpected unchanged at 2.25. The bank indicated though that a further rate cut might be considered at the upcoming meetings. The Aussie dollar rebounded from the 0.7770 area to the 0.7840 area after the announcement of the unchanged decision.

Today, the calendar is very thin and uneventful. So, technical considerations will still prevail. Yesterday, sentiment on the dollar was a bit mixed. The downside of EUR/USD looked a bit exhausted and the dollar sent mixed signals too. USD/JPY struggles to sustain north of 120 and further losses of the euro beyond the recent lows look difficult short term. Currency investors await the effective start of ECB QE bond buying. On the US side of the story, markets are still pondering the chances of summer Fed rate hike. Such a scenario is still likely, but needs support from better US eco data. With US eco data mostly mixed of late, further broad-based USD gains are a bit more difficult short-term. Friday’s payrolls might bring more clarity. In this context, we expect EUR/USD and USD/JPY to hold a short-term consolidation pattern. In a day-to-day perspective, the dollar might drift a bit further off the recent highs. However, especially for EUR/USD, any rebound won’t go far ahead of the ECB meeting and the start of QE.

From a technical point of view, 1.1534 (reaction high)/1.1679 (reaction top) remains our first topside reference. A sustained break will be difficult. On the downside, the 1.1098 (correction low) is again on the radar. For a sustained break of this level a substantial rise in US bond yields is needed. The payrolls (Friday) are the next high profile US data. The dollar can stay well bid against a weak euro short-term, but confirmation from strong Payrolls is needed to start a new USD up-leg beyond the cycle low in EUR/USD. We maintain a EUR/USD sell-on-upticks approach but still hope for higher levels to add EUR/USD short exposure. For USD/JPY the key 120.83/121.85 resistance stayed out of reach for now. The pair holds well within the 115.57/121.85 trading range. A sell-on-upticks approach within this range is preferred.

Sterling rally taking a breather

Sterling had a strong run against the euro recently and even set a new multi-year high versus the euro early in Asia yesterday. The UK manufacturing PMI, an important piece of economic data, was very strong again. However, this time, sterling failed to profit. EUR/GBP even rebounded to the 0.7300 area. Cable was under pressure, too. The pair dropped to the mid 1.53 area. Yesterday’s price action suggests that sterling needs a breather after a fairly strong performance of late.

Today, UK construction PMI will be published. It is the least important of the three PMI’s which are published at the start of the month. A stabilisation at a higher level (59.0 from 59.1) is expected. The market reaction to the report, if any, should be only of intraday significance, at best. A disappointing release might be used as an excuse for some further short-term profit taking on sterling longs.

Longer term we maintain a sell-on-upticks approach for EUR/GBP, especially as we expect the euro to stay under moderate pressure as QE is implemented. Short-term, sterling apparently needs a breather after the recent rebound, both against the euro and the dollar.