USD rebound continues

Dollar strength and to a lesser extent euro weakness remained the dominant currency themes yesterday. The dollar was supported by a growing belief that the Fed wants to start a gradual rate hike cycle in a not that distant future. At the same time, EMU political uncertainty in the wake of the Spanish elections and rising tension on Greece weighed at on the euro too. The US eco data were marginally better than expected. This kept the dollar well bid. USD/JPY broke out of the sideways range (top 122.03) and even regained the 123 barrier. EUR/USD finally closed the session at 1.0873 (vs 1.0978 on Monday).

Thin eco calendar. Consolidation on recent USD gains?

This morning, Asian equity markets show mixed picture, but outperform the US yesterday evening. The dollar is holding within reach of the recent highs against the yen and the euro. USD/JPY is changing hands in the 123.10 area. EUR/USD is quoted in the 1.0885 area. So, the dollar is holding strong this morning, but without follow through gains for now. Today, the calendars are nearly empty.
Over the previous days, the dollar was well bid as markets saw rising chances for a Fed rate hike in September. It is unlikely that markets will get any additional concrete information today. So, the focus will probably turn to the G7 meeting in Dresden. The official agenda contains global issues, but there will be a lot of informal talk on the Greece. We don’t see any big impact from the G7. Even so, we keep an eye at the intra-EMU credit spreads. Yesterday, yield spreads of peripheral bonds widened substantially, for the first time since long. If this trend persists, we might see some ‘classical’ risk-off trade with the euro, core European bond yields and even European equities all drifting south. For now this is only a hypothesis.

Recently, the dollar was strong on rate hike hopes and the euro was in the defensive as political uncertainty came again to the forefront. We don’t see a trigger for this global context to change short-term. So, we maintain a EUR/USD negative bias, even as the pace of the decline might slow temporary. USD/JPY remains well bid, too. For this cross rate we look whether/how long the rally can continue if sentiment on risk would deteriorate further. Short-term investors can consider partial stop-loss protection to defend against such a scenario.

Longer term, we maintain a cautiously positive bias on the dollar. Since last week, the dollar developed a bottoming out process. Interest rate differentials moved slightly in favour of the dollar and the US eco data were constructive, too. The late April/ Early May (EMU) bond sell-off supported the euro more than the dollar. There are 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 fails to profit from strong CBI sales

Yesterday , sterling trading was again mainly driven by the price moves in the dollar and in the euro. The UK data were largely ignored. The CBI distributive trades were very strong. So, the strong April sales as reported by the ONS last week might continue in May and June. However, the reaction of sterling was very limited. Cable was driven by global USD strength. Selling pushed the pair to an intraday low in the 1.5355 area. The pair closed the session at 1.5385 (from1.5470). The move in EUR/GBP was limited. The pair traded with a slight negative bias on global euro weakness. EUR/GBP closed the session at 0.7068 (from 0.7096).

Thin eco calendar today

Today, there are no important eco data on the agenda, so global trends will set the tone for sterling trading. In a day-to-day perspective, we have the impression that the dollar rally/euro decline might slow a bit. This might also be visible in the sterling cross rates. The downside in EUR/GBP looks a bit exhausted short-term.

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.