Dollar rebounds as global sentiment improves

On Friday, global market tensions eased. The move was first visible in the equity markets. However, gradually the risk-on sentiment also filtered through into commodity and the interest rate markets. Initially, the gains of the dollar were modest. The rebound accelerated after better than expected USD retail sales. EUR/USD closed the session at 1.1256 (from 1.1323 on Thursday) The gains in USD/JPY were even more substantial. USD/JPY closed the session at 113.25 (from 121.42).

This morning, the constructive market momentum persists. Mainland China indices reopened after the Lunar New Year holidays with only modest losses (given the sell-off on global markets last week). Chinese trade data (were weaker than expected, but are ignored. The PBOC set the yuan fixing 0.3% stronger (at least partially due to a weaker dollar during the holiday period). The CNY rebounded and the gap between the CNY and the fixing narrowed. The off-shore CNH initially weakened, but finally rebounded to trade currently stronger in the 6.4875 area. So, for now, the market doesn’t challenge attempts from the PBOC to stabilize the currency. Japanese Q4 GDP disappointed (see headlines), but were ignored. The major Japanese equity indices rebound 7%-8%! Supported by a weaker yen. USD/JPY rebounded further and trades currently in the 113.95 area. The dollar trades also slightly stronger against the euro with EUR/USD currently in the 1.1215 area. The rebound in oil and commodities also benefits the Aussie dollar (0.7165).

Today, there are only second tier eco data in Europe. US markets are closed for presidents day. The continuation of the Asian risk-on trade suggests also a positive start for European equities. This should be modestly supportive for the dollar. The global uncertainty on China and on the global economy won’t disappear at once. Even so, the current pause in the sell-off of riskier assets might push up US bond yields and help the dollar to stay away from the recent lows against the yen and the euro. Later this week, the January FOMC Minutes (Wednesday) and the US CPI are interesting. In Europe, the focus will be on the negotiations between the UK and the EU on the role of the UK in the EU. In case of open tensions in the run-up to the EU summit, this might be a negative for European (equity) markets. We assume that this kind of tensions are negative for the euro. In the context, we start the week with a cautiously USD positive bias. For EUR/USD, the 1.1060/70 support area is the first target.

From a technical point of view, EUR/USD broke above the 1.1060/1.1124 resistance area (15 Dec top: 62% retracement). This was USD negative. The short-term correction high stands at 1.1376. Next important resistance kicks in at 1.1495.The jury is still out, but we are looking for a topping out in EUR/USD. USD/JPY dropped below the key 115.98 pre-BOJ low. Japanese officials warned on potential action and this helped to put a short-term floor. Even so, the pair remains very vulnerable if global tensions resurface. We doubt that the time is ripe for a sustained USD/JPY rebound. Any rally might run into resistance quite soon. The 115.98 previous low is a first technical reference.

Sterling rebounds, but Brexit debate lingers

On Friday, sterling rebounded in line with the improvement in global sentiment. The move was in the first place visible in EUR/GBP. The strength of the rebound was a bit remarkable given the upcoming EU Summit on Brexit this week. So, other technical factors might have been at work. EUR/GBP dropped to the mid 0.77 area and closed the session at 0.7762 (from 0.7822). Cable initially rebounded to the 1.4570 area, but lost some ground as the dollar rebounded later in the session. The pair still closed the session in positive territory at 1.4503 (from 1.4477).

Overnight, the UK Rightmove House prices were good at 2.7% M/M and 7.3% Y/Y. Sterling is gaining slightly further ground against the euro and the dollar this morning, but this is probably due to the overall positive sentiment on risk. Today and later this week, the Brexit debate might come to the forefront. There will also be some important UK eco data, including CPI on Tuesday, labour market data on Wednesday and retail sales on Friday. It might still be a bumpy road for the UK and the EU to reach an agreement acceptable for all parties. In this context, we stay cautions on sterling, even if global sentiment on risk is constructive at the start of the week. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Next big resistance stands at EUR/GBP 0.7898. A return below EUR/GBP 0.74 would be a first indication that sterling enters calmer waters.

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