USD holding strong after BOJ rate cut

The BOJ policy easing was the key driver for currency trading on Friday. The yen lost gradually ground throughout the day and finally settled in the 121 area. EUR/USD also drifted south, especially during the US trading session. It wasn’t clear whether this was dollar strength or euro weakness/profit taking on recent euro gains.US Q4 GDP growth was close to expectations. Still, the dollar gained some more ground after the publication. EUR/USD closed the session at 1.0831 (1.0940 on Thursday). Should we call it ‘by default’ USD buying as the BOJ and the ECB keep the door open for more negative interest rates?

Asian equities trade mixed this morning; Japanese equities continue the post-BOJ rally. The China manufacturing PMI’s show a mixed picture. The official PMI’s declined more than expected. The Caixin manufacturing measure was marginally stronger than expected. Chinese equities show losses of about 2%.
The PBOC fixed the yuan slightly weaker against a dollar which trades broadly strong. The off-shore CNH trades slightly weaker at USD/CNH 6.6066. The moves in USD/JPY and EUR/USD are limited. USD/JPY trades again slightly strong in the 121.35 area. At the same time, the dollar is losing some ground against the euro near 1.0850.

Today, the focus will be on the manufacturing PMI’s/ISM. The first estimate of the euro zone manufacturing PMI for January showed a decline from 53.2 to 52.3.We continue to see downside risks following a weaker IFO and EU commission’s confidence indicators. In the US, regional indicators were mixed, but the manufacturing ISM is expected to show a limited improvement from 48.2 to 48.5. For the US, we are a little more optimistic. Of late, a big deviation from consensus was needed for EMU or US data to move the dollar in a sustained way. It’s far from sure that today’s data will be able to give this guidance. The post-BOJ momentum was USD positive. We don’t see why this should really change today. So, we expect the dollar to stay relatively strong against the yen and the euro. Oil and equities remain a wildcard. If global sentiment remains constructive, EUR/USD might go for a retest of the 1.08 area. However a break proved very difficult of late.

From a technical point of view, EUR/USD several times tried to break below the 1.08 barrier, but a sustained down-move didn’t occur, leaving the pair in a very tight sideways consolidation pattern. 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 difficult to break. We look to sell EUR/USD on upticks for return action lower in the range. The picture for USD/JPY improved as the pair rebounded above 120 after Friday’s BOJ policy decision. Even so, we are reluctant to position for further sustained USD/JPY gains.

Sterling rebound runs into resistance soon

Sterling had a good run on Thursday, supported by a higher oil price and a good UK Q4 GDP report. However, these factors disappeared on Friday and this left the UK currency again vulnerable. Cable slipped from the 1.44 level early in the session to an intraday low of 1.4150. The pair closed the session at 1.4244. This wasn’t only GBP weakness, but also some post-BOJ USD strength. However, sterling also struggled to maintain Thursday’s gains against the euro. EUR/GBP initially rebounded back above the 0.76 big figure, but closed the session at 0.7608, little changed from the 0.7618 close on Thursday. Still, Friday’s price action was a bit disappointing after a constructive move on Thursday.

Today, the UK Money supply and lending data and the UK January manufacturing PMI will be published. The manufacturing PMI is expected to decline further from 51.9 to 51.6. Lending data are also expected a bit softer. Of late, global factors including oil were more important for sterling trading rather than specific UK eco data. Even so, we see downside risks for sterling if the PMI disappoints. This week, there will be a lot of headlines on the EU/UK Brexit talks. Latest news suggests that the talks are developing in a constructive way, but no deal has been reached yet. We think it’s too early to become sterling positive because of good news on the Brexit issue. The internal political debate in the UK will persist.

In a longer term perspective, uncertainty on Brexit and global negative risk sentiment remain 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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