USD records slight losses as equity rebound stalls

On Monday, trading on global markets was mainly driven by the gyrations in the oil price. Oil declined early in Europe and during the US session capping the rebound in global equities.. This oil-driven setback weighed slightly on the dollar. However with USD/JPY closing the session at 118.30 and EUR/USD holding in the 1.0850 area, the losses of the US currency were limited.

This morning, Asian equities fall sharply with Chinese equity indices showing losses of up to 5.0%. Oil extends its slide with Brent again trading below $ 30 p/b. The PBOC continues to stabilize the yuan and fixed it again marginally stronger. However, renewed uncertainty on the equity markets this time weighs on the off shore yuan (USD/CNH at .61673 currently).The rebound of the Hong Kong dollar halted, too. The Canadian dollar (USD/CAD 1.4310) and the Aussie dollar (AUD/USD 0.6935) also suffer from the decline in the oil price, but for the Aussie dollar, the losses are moderate. The dollar trades again marginally lower against the yen (USD/JPY at 117.90), but is stable vs the euro (1.0850 area).

Today, focus is on US eco data with house prices , the services PMI, Richmond Fed manufacturing index and consumer confidence. We see upward risks for consumer confidence and for the Richmond Fed index. However, just one day before the FOMC meeting, a really big surprise is needed to cause a meaningful rebound of the dollar. Equities and oil will again be at least as important even as the link between the dollar and developments in other markets has loosened. This is especially the case for EUR/USD, which has settled in a tight range of late. The negative sentiment on Asian markets suggests some downside risk for the dollar today. However, with investors counting down to tomorrow’s FOMC decision and to the BOJ meeting on Friday, we also expect any decline of the dollar to remain limited. It’s a bit waiting for Godot.

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 and on Friday, but a break didn’t occur.

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 turns back south

At the end of last week, the sterling rebounded nicely as oil and global equities surged. Poor UK eco data were ignored. However, this risk-on rally stalled yesterday. Especially oil underwent a substantial setback. This left its traces on sterling. EUR/GBP rebounded north of 0.76 and closed the session at 0.7614 (from 0.7526 on Friday). Cable also lost gradually ground throughout the day, but with the dollar also trading in the defensive, the decline developed in a gradual way . The pair closed the session at 1.4249 (from 1.4265 on Friday). The UK January CBI industrial trends survey painted a mixed picture. Orders declined more than expected, but the quarterly business survey showed signs of a rebound. We didn’t see any lasting impact on sterling.

Today, there are not important UK eco data on the agenda. Overnight, BoE’s Forbes said that the latest fall in oil prices gives the BoE ‘the luxury to of a bit more time, to check whether wages will pick up. Overall Forbes sounded relatively positive on the labour market. However, it doesn’t help sterling this morning, The decline in oil and the sell-off on Asian equity markets is sending sterling back south.

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.

•  Download Full Sunrise Market Commentary Currencies