Dollar doesn't fully profit from strong US payrolls report

On Friday, currency markets looked for a new equilibrium after yesterday’s post-ECB repositioning, which pushed the euro sharply up in a short squeeze and hit the dollar. The dollar tried to regain some ground, but the move had no strong legs. The US payrolls were slightly better than expected and oil prices were under pressure on the OPEC’s decision to raise the output ceiling. However, it didn’t immediately help the dollar much. Following yesterday KO, investors were not yet in the mood to reinstall new dollar long positions. However, later on in the US session, the dollar finally made some headway, but without much conviction. EUR/USD closed at 1.0881, down from 1.0940 at Thursday’s closure. USD/JPY closed at 123.11 from 122.60 on Thursday and remains in its month long tight 122.20 to 123.80 range.

This morning, Asian equities trade a bit mixed but winners dominate losers. The dollar gains cautiously ground against the euro and the yen after a weaker opening. EUR/USD trades in the 1.0865 area. USD/JPY changes hands in the 123.20 area. Commodities show a mixed picture with some industrial commodities recording slight gains. Brent oil dropped below $43/barrel. The Aussie dollar is off Friday’s top, which was a test of the resistance, but with minor intraday losses (0.7330).

Today, there are few eco data with market moving potential on the agenda in the US as well as in Europe. Fed’s Bullard will be one of the last Fed members to give his view on Fed policy before the start of the black-out period. However, his view (starting the lift-off) is well-known in the market. So trading will be driven by technical considerations. Sentiment on risk is marginally constructive in Asia this morning. However, over the previous days, this was no guarantee for dollar strength. We still look out whether the post-ECB correction will have to go much further. Interest rate differentials at 2-yr between Germany and the US have declined from the 140 bps area to around 125 bps currently. This is already quite a substantial adjustment.

With the ECB deposit rate at -0.3%., the euro faces still an impressive interest rate disadvantage. The dollar will preserve a substantial interest rate support, as a lift-off in December is baked in the case. On the other hand, US interest rates fell after Friday’s US payrolls (due to lower oil prices).

This suggests that it will take some time (and some good US eco data) for the dollar to regain further ground. Later his week, we look out to the US retail sales and the US PPI. Those data might fuel the debate on the potential pace of Fed tightening after lift-off. From a technical point of view, first resistance in the 1.0800/30 has been easily recouped. The 38% retracement from 1.1714 to 1.0524 stands at 1.0979 and was tested after the ECB decision. A previous range bottom/break down area comes in at 1.1087.This might become a first tough resistance going into the Fed policy decision. ST investors can look to (re)sell EUR/USD in case of upticks toward this area. The day-to-day momentum of USD/JPY looks constructive. However, the pair remains blocked in a tight sideways range. For now, a break higher and a retest of the year highs (125.28/86 area) looks not that evident.

EUR/GBP still close to the correction top.

On Friday, there were no important eco data in the UK or EMU. The surprise ECB decision (on Thursday) caused on Friday a rebound of cable and a rise in EUR/GBP as cable underperformed EUR/USD. Cable basically hovered sideways in a range between 1.5075 and the 1.5160 area and closed in the middle at 1.5112 versus 1.5144 previously. EUR/GBP to some extent followed the intraday price pattern of EUR/USD. An early attempt to go south was rejected. After the payrolls/OPEC decision, the pair retested the 0.7230 intraday highs, but following the post ECB gains, the pair looked exhausted. Finally, stronger US equities helped both the dollar and sterling slightly higher versus the euro. However, given the huge post ECB losses, these gains were insignificant. The EUR/USD pair closed at 0.7198, down from 0.7223 on Thursday. So, sterling sentiment remains fragile.

Today, the UK and EMU calendars are devoid of key eco data. So, sterling trading will be technically oriented and driven by moves in main crosses. As is the case for EUR/USD, the jury is still out whether the repositioning has run its course. A less accommodative ECB over time might make it easier for the BoE to raise rates, if the data would allow them to do so. It is still early days, but in that scenario, one should expect a real long-term trend reversal in EUR/GBP. At this stage it is too early to bet on such a scenario. In a day-to-day perspective, we expect technically inspired trading near the 0.7250 resistance area.

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