Dollar rebound slows

On Tuesday, global market sentiment remained constructive early in the session, but was dampened by the deal to freeze oil production later.
European shares reversed their gains, but the impact on global core bonds was limited. The dollar came under pressure. Especially USD/JPY fell prey to profit taking. The losses of the dollar against the euro were much more limited. In technical trading, the dollar even found a better bid later in the session. EUR/USD closed the session at 1.1144 (from 1.1156 on Monday). USD/JPY closed the day at 114.07 (from 114.60).

This morning, most Asian equities are in correction modus after the gains of the previous days. Chinese equity markets outperform with slight gains as the PBOC fixed the yuan weaker at 6.5237. Both the CNY and the CNH trade slightly weaker this morning at 6.5245 and 6.5248 respectively. Elsewhere in the region, the South Korean Won trades at a five year low against the dollar on market speculation of potential further easing. USD/JPY is holding south of the 114 barrier as global sentiment turned slightly risk-off in Asia, despite a good equity performance in the US yesterday evening. EUR/USD trades little changed in the 1.1165 area. Oil remains under pressure with Brent currently testing the $32 p/b.

Today, there are no data with market moving potential in Europe. In the US, housing starts, building permits, PPI and industrial production will be published. On average, we expect the US data to be inline or even slightly better than expected. Later in the session, the Fed will publish the Minutes of the January policy meeting. The interdental debate and the tone off the minutes might be a bit softer than the official communiqué as published after the meeting. Of course, a lot of the interpretation work is already done by Yellen at the hearing before Congress. Even so, If several Fed member are openly inclined to move toward a slow-down of the rate hike path, it might be a negative for the dollar. Aside from the data and the Fed minutes, global market sentiment will play its role for USD trading as well. Given the intraday price action in Asia and the decline of the oil price, we assume that the dollar won’t get much support from the global market context this morning. We started the week with a cautiously USD positive bias.

There is no obvious reason to really make a U-turn, but further sustained USD gains against the euro might become more difficult. 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.We see some short-term topping out process in EUR/USD. USD/JPY dropped below the key 115.98 pre-BOJ low. Japanese officials warned on potential action and this put a short-term floor. Even so, the pair remains 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 stays on the defensive ahead of EU summit

On Tuesday, sterling trading was in a wait-and-see modus. Investors were looking for more concrete signals on the outcome of the EU/UK negotiations. Currency traders were apparently a bit afraid being wrong-footed by a higher than expected UK CPI. Sterling gained against the euro and the dollar in the run-up to the UK CPI report. Headline CPI was close to expectations (0.3% Y/Y) but core inflation was marginally softer at 1.2% Y/Y. So, the report didn’t provide any trigger for sterling shorts to feel uncomfortable going into the EU summit.
Sterling reversed the earlier gains. Later in the session, sterling came again under pressure as also the oil price dropped further. Ahead of the EU/UK Summit, sterling remains vulnerable to negative news. EUR/GBP closed the session at 0.7798 (from 0.7726 on Monday). Cable closed the session at 1.4306 (from 1.4435).

Today, the UK labour market report is expected to confirm a rather healthy state of the UK labour market with the unemployment rate declining to 5.0% and decent employment growth. At the same time, the weekly earnings are expected slightly softer compared to the previous month. Usually the labour market report is one of the most important data series for sterling trading. Currently, the market focus is on the Brexit debate and on the negotiations between the UK and the EU. In this context we see an asymmetric risk. A poor figure might reinforce the sterling negative momentum. A good report might have much less impact. We stay cautious on sterling gains until there is more clarity on the EU/UK negotiations. Pressure on sterling might ease once a deal is reach, but it’s too early to preposition for such a scenario. There is too much binary risk.

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