Dollar rebound running into resistance

On Tuesday, USD trading more or less continued along Monday’s pattern. Initially, the dollar was well bid and equities traded strong too. The decline of the euro was reinforced by disappointing EMU data. Fortunes for the dollar changed (a bit) as sentiment on risk turned negative later in the session. However, a strong US consumer confidence release kept the dollar near the short-term highs. USD/JPY closed the session at 120.13 (from 120.07). EUR/USD traded at 1.0731 (from 1.0833) at the end of the session.

USD/JPY slides south on disappointing Tankan

Overnight, key Asian data were mixed. The Tankan business survey showed an improvement in activity, but less than expected. The Chinese manufacturing PMI rose from 49.9 to 50.1. Growth in the non-manufacturing sector slowed from 53.9 to 53.7. Equities reacted more or less in line with the data. Japanese equities are in the red. China shows decent gains. USD/JPY came under pressure after the Tankan and dropped to the mid 119 area. However, equities and USD/JPY are regaining ground after the publication of the Chinese PMI’s. The decline USD/JPY also pushed EUR/USD higher in the 1.07 big figure.

USD rally to slow on struggling equities?

Today, the final EMU manufacturing PMI will be published. A slight upward revision is still possible. However, we doubt that this will be a key factor for euro trading. The focus of markets will be on the US data and on equities. In the US, we see upside risks for the ADP labour market report (consensus 225 000) and the US manufacturing ISM (consensus 52.5). So, in theory, the data could be slightly supportive for the dollar. At the same time, there was somewhat of an inverse correlation between (US and European) equities and the dollar. US equities had a difficult close yesterday evening and are again in the red this morning. Investors are apparently cautious on stocks going into the start of the earnings season. A risk-off context might support core bonds and deprive the dollar of highly needed interest rate support. In this context, further sustained gains of the dollar might become less evident even as the euro isn’t in good shape either. To conclude: there was no clear-cut explanation for the dollar rebound over the previous days and uncertainty on equities might complicate further USD gains. So, in a day-to-day perspective we turn a bit more cautious on the dollar even as we stay positive on the US currency longer term.

The long-term technical picture for the EUR/USD cross rate is bearish since the pair dropped below the previous cycle low (1.1098). The 1.0500 area was extensively tested, but a sustained break didn’t occur. The dollar started a correction after the March Fed meeting. The 1.1043/98 (post FOMC high/prev. low) resistance area was tested last week, but the test was rejected. A rebound north of 1.1534, still far away, is needed however to question the downtrend.
USD/JPY tested the 121.85/122.03 resistance, but a break didn’t occur. The post-Fed setback didn’t change the USD/JPY picture fundamentally. The pair is till captured in a tight sideways pattern around the 120 pivot (118-122). The downside looks a bit better protected short-term.

Sterling rebounds on UK GDP revision

Yesterday, sterling was in much better shape. The UK currency rebounded against an overall weak euro and held up reasonably well against a strong dollar. An upward revision to the Q4 UK GDP improved sentiment on the UK currency. EUR/GBP closed the session at 0.7243 from 0.7315 on Monday. Cable was little changed (1.4818 vs 1.4810).

Today, the UK manufacturing PMI will be published. Over the previous months, the index showed a gradual rebound and this trend is expected to continue (the consensus expects a rise from 54.1 to 54.4). We see risks for a better than expected report. It will be interesting to see whether sterling can further profit from good UK eco data. Even so, we expect any sterling rebound to be guarded as the elections will probably prevent investors from placing big long sterling bets.

EUR/GBP to hold the sideways trading pattern

Recently, we advocated to protect EUR/GBP shorts against a temporary countermove and were in no hurry to reinstall EUR/GBP shorts. On Thursday, we got a first sign that the EUR/GBP rally was running out of steam. However, the picture for sterling remains fragile as cable remains in the defensive. We look how the EUR/GBP 0.74 resistance fares. Any decline in EUR/GBP will probably be due to euro weakness rather than a sustained rebound of sterling. For now we keep a neutral/wait-and-see bias on EUR/GBP and look for confirmation that the rebound as run its course.