Euro rebounds on hopes for Greek solution

On Monday, the recent slide of the dollars slowed temporary. EUR/USD was initially under pressure as markets pondered the consequences of tumultuous euro group meeting on Greece on Friday. However, this initial euro slide was short-lived. The euro rebounded on headlines that Greece changed its negotiation team, suggesting that this would facilitate an agreement. EUR/USD jumped north of 1.09 and European equities reversed earlier losses. This time US equities underperformed. This was a slightly negative for the dollar. EUR/USD closed the session at 1.0891 (from 1.0873). USD/JPY was little changed at 119.04 (from 118.99).

This morning, Asian equities trade mixed. Especially Chinese equities trade volatile. Yesterday evening, USD equities showed some dismal price action. For now, the correlation between the dollar and equities is weak. Even so, we have the impression that a deterioration in sentiment on risk might hurt the dollar a bit more than the euro and the yen, at least in a short-term perspective. EUR/USD is changing hands in the 1.0875 area, USD/JPY in the 119.10 area.

Greece out of the way as a driver for (currency) trading?

Today, the calendar only contains second tier eco data in Europe. In the US, the CS house prices, consumer confidence and the Richmond Fed manufacturing index will be published. The consensus expects a slight improvement. for consumer confidence and for the Richmond Fed index. Consumer confidence is the most important release from a market point of view and we see here downside risk. If so, it might be a negative for the dollar short-term. However, any market reaction will probably be guarded ahead of tomorrow’s FMOC policy announcement. On Greece, the market is now probably positioned for a likely positive outcome. Will the issue move to the background?

USD caution ahead of the Fed decision.

Over the previous days, we indicated that there was 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. We keep a USD cautious assessment going into the Fed policy announcement.
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 well bid ahead of Q1 GDP release

On Monday, cable initially drifted from the 1.5175 area to the 1.5128 area. A moderate setback of EUR/USD probably provided a good excuse to take some profit on cable after the strong run on Friday. EUR/GBP hovered in a tight sideways range in the 0.7150/70 area. At noon, the CBI trends orders were slightly below the market consensus As usual, the report had hardly any impact on sterling. On the contrary, sterling momentum stayed constructive later in the session. EUR/GBP closed the session at 0.7147, from 0.7116 on Friday. Cable was supported by the dollar decline (EUR/USD rebound) and close the session at 1.5238 (from 1.5188).

Today, the focus for sterling trading will be on the first estimated of the UK Q2 GDP. A rise of 0.5% Q/Q and 2.6% Y/Y is expected. We see the consensus estimate as quite reasonable. After last week’s positive BOE minutes, an upward surprise could be further sterling supportive.

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.