USD in the driver's seat

Yesterday, in thin trading the euro continued to fight an uphill battle, while the dollar was well bid. The dollar was supported by comments from Fed Yellen who sounded cautiously optimistic on the US economy. A rate hike in an not that distant future looks still a viable option. At the same time, the euro faced headwinds from the gains of the opposition at regional Spanish elections and as Greece indicated that there is a real chance that it won’t repay an IMF loan on June 5. EUR/USD tumbled already remarkably Friday and the pair didn’t give any signal of a comeback yesterday. The pair hovered in a tight range close to, mostly below the 1.1 mark. USD/JPY was in good shape, too and preserved Friday’s gains in the mid 121.50.

EMU political uncertainty and USD data in focus

This morning, the themes remains those of last days. The Fed keeps the door open for a rate hike (Mester, amongst others) which continues to support the dollar. USD/JPY is heading higher in the 121 big figure, with the 122.03 range top coming in the picture. EUR/USD is drifting lower in the 1.09 area. Sentiment in Asia is risk-on. This might be slightly supportive for USD/JPY. For EUR/USD, euro weakness remains an issue as the negotiations between Greece and its creditors remain in crisis modus. So the euro stays in the defensive at the start of trading

In the US, there are plenty of eco data on the agenda with the US durable orders, House price, consumer confidence, New Home sales and the Richmond Fed index on the agenda. We see downside risk for consumer confidence, but upside risks for the durable orders and for the Richmond Fed index. The scenario of improving US activity data might be a supportive for the dollar. Fed speakers give the impression that the Fed doesn’t want to wait too long with starting a (gradual) rise in interest rates. In a short-term perspective, Friday’s dollar rally/euro decline was overdone, at least when compared to the limited upside surprise in the US CPI. At the same time, it reinforced the feeling that the USD correction is bottoming out and that investors are becoming more confident of an improvement in the US economy going forward. Today’s data are important in this respect. We see no reason to row against the short-term USD positive momentum. (EUR/USD negative bias). A break of USD/JPY beyond 122 might be an indication of a further improvement in sentiment on the USD

Longer term, we maintain a cautiously positive bias on the dollar. Last week, the comments from ECB’s Coeure helped to block the rebound of the euro while some US data were USD supportive. This helped the recent bottoming out process of the USD. Interest rate differentials moved slightly in favour of the dollar. So, the short-term picture turned a bit more USD constructive. The late April/ Early May (EMU) bond sell-off was an important driver for currency trading. The rise in core bond yields supported the euro more than the dollar.
There are tentative signs that this pattern is changing. If the decline of the Bund stalls, the euro rally could peter out too. EUR/USD 1.1534 (early February top) is the next important resistance for EUR/USD. A sustained break beyond this level would be important and indicate further USD weakness. This is not our preferred scenario. However, a sustained rebound of the dollar needs more confirmation that the US Q1 dip was indeed temporary. It might take time to clarify this issue.

Sterling at the mercy of euro and USD gyrations

On Friday, there were tentative signs that the recent good performance of sterling was losing momentum and that the UK currency was ripe for some consolidation/profit taking. However, finally the sharp swings in the dollar and the euro also set again the tone for trading in cable and in EUR/USD. Overall USD strength hammered cable on Friday and continued to weigh yesterday and this morning. Even in the USD driven sell-off, cable still outperformed the decline in EUR/USD, pushing EUR/GBP back below the 0.71 big figure. This move is in the first place due to euro weakness rather than GBP strength.

CBI distributive trades in focus.

Today, the UK CBI distributive trades will be published. After last week’s strong April ONS sales, sterling investors will be keen to see whether the positive momentum in the sector is maintained. That said, we have the impression that sterling trading will again in the first place be driven by the global trends in the dollar (USD strength) and the euro (euro weakness) today .

Sterling remained in good shape last week even as expectations for a BoE rate hike are pushed back to 2016. The short-term momentum was sterling constructive, but we have the impression that enough good news is discounted. Euro weakness still might keep EUR/GBP under moderate pressure. USD strength will probably dominate cable.