Dollar on the defensive, despite rising Greek tensions

On Friday, the dollar remained on the defensive. Poor US durable orders slightly reinforced the negative USD sentiment and interest rate differentials moved in the disadvantage of the dollar. The news flow for the euro was also mixed. The IFO was strong, but negative comments from Eurogroup chairman Dijsselbloem on the negotiations with Greece capped the intraday rebound of the euro. EUR/USD closed the session at 1.0873 (from 1.0824 on Thursday). USD/JPY dropped (temporary?) below 119 and closed the day at 118.99 (from 119.58).

This morning, sentiment on Asian/Chinese equity markets (ex Japan) is mostly constructive. Markets still hope an ongoing accommodative policy stance from Chinese authorities. The stronger yen weighs on Japanese equities. USD/JPY is hovering in the 119 area. EUR/USD is trading in the mid 1.08 area. There is still no big fall-out from the open rift between Greece and the other EMU members.

More fall-out from the Greek turbulence?

Today, there are only second tier eco data. So, markets will look forward to the US Q1 GDP release tomorrow and the FOMC policy statement on Wednesday. In Europe there will be a lot of market talk on the possible options for Greece.
There were articles in the German press this weekend that the German government was preparing for the possibility of a Greek default. However, they have very limited impact on global markets. Global equities remain in good shape and European bourses stay close to the recent highs. The spread-widening of other peripheral bonds remains limited. The positive sentiment on US bond markets slightly narrow the interest rate differential between the US and Europe. This weighs currently (slightly) on the dollar. It is a bit strange to see EUIR/USD gaining ground even as uncertainty on Greece mounts. However, for now, dollar weakness prevails. The upcoming FOMC meeting/policy announcement and the fear for a poor Q1 US GDP apparently weigh more.

No single driver for dollar

At this stage there is still no obvious single driver from USD trading in general and for EUIR/USD in particular. So, we hold a neutral bias ahead of the Fed. The dollar is on defensive, but we don’t see strong reasons why EUR/USD should regain the 1.10/1.1052(98) resistance area in a sustained way. The USD/JPY momentum clearly deteriorated. The 118.18 range bottom isn’t that far away.

The LT picture remains bullish for the USD, but the soft patch in the US is taking longer and some Fed governors see the economy having difficulties to get escape velocity. Therefore, they will wait longer before tightening policy. This is dollar negative. Of course, on the side of the euro, QE will keep rates under downward pressure. At the same time, EMU eco data are improving. So, this brings the EUR/USD short term more in balance. Some dollar bulls may still have to reposition and therefore EUR/USD may revisit the 1.1098 area. We see the 1.0462-to 1.1098 range as appropriate short term.

Sterling some kind of ‘by default’ winner

On Friday, trading in EUR/GBP and cable was at the mercy of the price swings in the euro and in the dollar. Early in European trading, EUR/USD spiked higher and this propelled EUR/GBP temporary above 0.72. Later, negative headlines from the Eurogroup meeting in Riga on Greece reversed fortunes for the single currency. EUR/GBP dropped to the 0.7150/60 area. Cable profited from the early morning decline of the dollar and wasn’t affected by the Greek-driven decline of EUR/USD later. The pair closed the session very strong at 1.5188, sharply higher compared to Thursday’s close of 1.5057.
Today, the UK CBI industrial trends orders will be published. A rebound in orders is expected after last months’ setback. Sentiment on sterling is constructive, but we don’t expect today’s data to have a lasting impact on sterling trading. The swings in the dollar and the euro will probably continue to set the tone for sterling trading. For now, there is still little negative fall-out from the uncertainty on the elections.

Of late EUR/GBP was locked in a sideways range in the 0.7150/0.7400 area. The negative impact of the election uncertainty on sterling eased of late. Last week sterling broke temporary out of the established ST range (0.7150 area) on positive BoE minutes. This test is still ongoing. Sentiment on sterling is fairly constructive, but we maintain the view that further sustained sterling gains will be difficult ahead of the elections.