Next report will be published on Tuesday 5th of January 2016

Dollar gains modestly after FOMC decision, but now profit taking?

Yesterday, the dollar showed some more vigour than immediately after the FOMC meeting Wednesday eve. It appreciated across the board supported by short-term US yields that held near the recent highs. Even so, the gains of the US currency remained moderate, especially as global stocks rallied sharply at least until US traders entered the fray. US equities fell prey to profit taking, also as oil resumed its decline, even approaching the lows (WTI). EUR/USD tested the 108 big figure and closed at 108.26 versus the 109.12 previous close. So the damage of declining equities was modest. USD/JPY went up as well the day after the FOMC lift-off and the subsequent risk-on sentiment and lost only slightly late in the US session when US equities hit the skids. It closed at 122.56, up from 122.12 previously. Currently trading in the 1.0850 area.
USD/JPY near 122.60. The dollar was overall stronger yesterday reflected in a good advance of the trade weighted dollar (DXY).

Overnight, the BOJ announced some new measures like a new 300bn yen ETF buying programme, focussed on shareholder friendly and profitable firms, a lengthening of the bond maturity of its purchases and changes to the J-Reits programme. More details follow later today. However, at first view, it doesn’t look a substantial change in its policy, as the amounts involved are small. On the decision USD/JPY spiked to 123.56 only to drop immediately and trades now down at 121.96. So, yesterday’s break of the USD/JPY 122.25 resistance has not be confirmed. Asian equities keep up better than Wall Street yesterday, with the exception of Japan. The T-Note trades higher, but commodities go higher too, after steep losses yesterday. So, no obvious full blown risk-off sentiment at the start of European trading. EUR/USD trades slightly higher around 1.0850.

Last week, the dollar dropped below important support against the euro and the yen, but the USD currency found its composure ahead of the FOMC decision. The Fed, as expected, confirmed that policy normalisation will be gradual. The Fed dots suggest 4 additional rate hikes in 2016. This is no outright predication of what the Fed will do actually , but it was less dovish than we expected. Short-term interest futures incorporate a second rate hike in spring rather than in the summer. This gives the dollar some additional interest rate support. For now, the dollar is holding fairly strong , but further sustained USD gains are unlikely if the global equities would run into resistance or fall prey to profit taking. Global market liquidity will also dry up soon as the Christmas holiday and the end-of year approaches fast. Trading might become erratic in nature. To summarize: the Fed policy is slightly USD positive, but we don’t expect a big leap higher of the dollar for now. The downside of the dollar, especially against the euro, is better protected.

From a technical point of view, EUR/USD cleared the 38% retracement from 1.1714 to 1.0524 standing at 1.0979, making the picture again neutral. A previous range bottom/break down area comes in at 1.1087 and finally the 62% retracement from the October high at 1.1124. If this area would be broken it would make the picture dollar bearish. However after the Fed decision, this area looks better protected. A sustained decline below 1.0796 would improve the technical picture for the dollar, but an initial test yesterday failed. USD/JPY dropped below a short-term range bottom in the 122.25 area, turning the short-term picture in this cross rate negative. Yesterday, the pair broke above the resistance, but couldn’t sustain and trades currently again below the level. We will closely watched whether the pair manage to return above 122.25.


Sterling hardly profits from strong UK retail sales.

On Thursday, there were very strong November UK retail sales, but prices remained under pressure and CBI orders were also better than expected.
Sterling jumped higher for one millisecond but immediately met selling, suggesting that the sterling sentiment remains fragile. EUR/GBP gradually went again to the 0.73 handle, but also taking out this level was one step too far.
EUR/GBP settled again around opening levels to close nearly unchanged at 0.7264. Markets apparently maintain the view that the BoE won’t join the Fed anytime soon, as price pressures remain subdued.
Cable spiked temporary to the 1.50 area on the retail sales release, but immediately fell back. USD strength prevailed and cable dropped to a new ST low at 1.4865, before closing at 1.4901.
The pair currently trades in the 1.4935 area. Overnight, some overall dollar weakness pushed cable to 1.4932.

Today, the UK calendar is empty and so is the EMU one. US eco data are unimportant for trading. Fed Lacker speaks after European closure. The EU discussion on a Brexit is still ongoing with a press release expected at 10:00 CET.
However, it is unlikely that Cameron has an agreement and still less sure that it will benefit sterling. In this respect, the risk sentiment on equity markets and the commodities will give direction. The latter trade higher following a big drop yesterday. Technicals don’t favour sterling, but EUR/GBP resistance still holds and the bottom of the downchannel in cable too (see graphs).

Sunrise Market Commentary: Currencies

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.

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