USD-gains stay modest despite risk-on rebound

On Friday, the dollar initially gained some further ground in Asia, but the rebound slowed in Europe. The EMU PMI’s were disappointing, but didn’t hurt the euro. Sentiment stayed risk on and oil rebounded further, but the dollar gains were meagre. The risk-on rebound continued in US trading with oil returning to the $32 p/b level. The dollar finally eked out some additional gains. USD/JPY closed the day at 118.78 (from 117.70 on Thursday). EUR/USD drifted south to close the day at 1.0796 (from 1.0874). Still, Thursday’s post ECB low (1.0778) was left intact.

This morning, Asian equities show moderate gains. Brent oil is holding close to the recent top ($ 32 p/b). The PBOC continues last week tactics to stabilize the yuan. The bank set the fixing of the yuan marginally stronger. This weekend, Chinese officials stepped up verbal interventions and reiterated that the country doesn’t want to devalue its currency. The off-shore yuan trades slightly stronger at 6.6073. The Hong Kong dollar extends last week’s rebound and trades at 7.7885. Despite the ongoing risk-on sentiment, the dollar trades marginally weaker against the yen (118.70) and the euro (EUR/USD 1.0815).

Today, the January German IFO business climate indicator is the only release of interest. It is forecast to have weakened slightly further (from 108.7 to 108.4). We see risks for a weaker outcome, especially after Friday’s disappointing PMI. A weak figure is slightly euro negative, but similar to Friday’s EMU PMI’s, the reaction should be limited. The focus for USD trading is on global developments and on the policy decisions of the Fed (Wednesday) and the BOJ (Friday). The former will stay put, but markets will look whether the statement is more dovish than in December, which should be the case. BOJ’s Kuroda in Davos downplayed the impact of the recent turmoil. Still, the call on the BOJ is a closer one. The recent turmoil, appreciation of the yen, low oil prices, the pre-announcement easing by ECB and deteriorating growth prospects all raised the pressure on the BOJ to add stimulus. Still we expect to BOJ to keep its wait-and-see approach.

In a day-to-day perspective, more substantial USD gains might be difficult. The risk-on rally might slow ahead of the FOMC decision, which might be softer.

So, the dollar won’t get much additional interest rate support. Oil remains a wildcard for global sentiment on risk and for USD trading.

From a technical point of view, EUR/USD failed to regain important resistances at 1.1087 (breakdown) and 1.1124 (62% retracement from the October high).
Earlier this month, EUR/USD failed also to sustain below 1.0796 support (07 Dec low). This area was again tested yesterday. Next support is at 1.0711/1.0650 (correction low/76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.0985/1.1004 (reaction top) is a first reference. This level was left intact even as sentiment was outright risk-off before the ECB meeting. Next resistance comes in at 1.1060/1.1124 (15 Dec top/62% retracement). We expect this resistance to be strong and difficult to break. After the ECB announcement, we look to sell EUR/USD on upticks for return action lower in the range. The picture for USD/JPY remains negative below 120, but the pair tries to build a bottom. Still, we think that a sustained return above 120 will be difficult.

Sterling rebound to slow?

On Friday, the ongoing post-ECB rebound and the comeback of oil supported sterling further. EUR/GBP dropped to the 0.76 area ahead of the publication of the Dec. UK retail sales data. These were much weaker than expected, suggesting weaker Q4 growth. Even so, sterling ignored the report and even touched new highs, driven by a constructive market sentiment. EUR/GBP closed the session at 0.7571 (from 0.7647). Cable closed at 1.4265 (from 1.4221). So, sterling enjoyed a corrective rebound, but driven by non-UK factors.

Today, the UK January CBI trends orders will be published. A modest further decline from -7 to -10 is expected. The sterling reaction to the CBI orders is mostly limited. Even so, sterling probably won’t continue to ignore poor UK data the way it did last week. In this respect, the Q4 GDP estimate (Thursday) might be important. A further slowdown might weigh on sterling. Last week’s sterling rebound was driven by the global factors. If the risk-on rebound (equities/oil) slows, sterling might run into resistance. We also keep an eye at the meeting of EU interior ministers on Schengen as it might affect the Brexit debate. In a day-to-day perspective, Friday’s highs against the euro/dollar might be a first tough resistance.

In a longer term perspective, uncertainty on Brexit and global negative risk sentiment are important drivers for sterling weakness. As long as these issues aren’t solved, a sustained sterling rebound is unlikely. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Next resistance stands at 0.7875. A return below 0.74 would be a first indication that sterling enters calmer waters.

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