Dollar maintains modest gains

On Wednesday, the Asian equity rebound ran into resistance, as the PBOC fixed the yuan weaker than expected. However, European and US remained constructive, protecting the dollar downside. The US PPI and production data were stronger than expected, supporting modest additional USD gains. Oil also went further up. The Fed Minutes showed that the FOMC acknowledged the risks from the recent market turmoil on growth and inflation. The impact on the dollar was limited, as equities continued to perform strongly. EUR/USD closed the session at 1.1128 (from 1.1144 on Tuesday). USD/JPY ended the session little changed at 114.10 (from 114.06).

Overnight, Asian equities reconnect to the rebound in the US. The rally is supported by an ongoing rise of the oil price. Chinese CPI rose slightly less than expected (1.8% from 1.6%). Chinese PPI (-5.3%) was marginally ‘higher’ than expected. The PBOC fixed the yuan slightly stronger at USD/CNY 6.5152. The CNY (currently at 6.5173) and the CNH (currently 6.5200) both rebound. Chinese equities underperform the rest of Asia. Japanese indices outperform after yesterday’s setback despite poor Japanese foreign trade data. USD/JPY is little changed from yesterday’s close and still struggles to regain the 114 barrier. The Aussie dollar fails to profit from higher oil prices, as labour data were substantially weaker than expected. The unemployment rate rose from 5.8% to 6.0%. The overall gains of the dollar remain limited (DXY more or less stable at 96.75). This pattern is also visible in EUR/USD. The pair trades little changed in the 1.1135 area. This morning, Fed’s Bullard kept said it wasn’t wise to tighten policy with inflation expectations falling. It might be slightly USD negative.

Today, only US data have market moving potential. The Philly Fed business outlook is expected broadly unchanged, but last month’s details suggest bigger gains this month too. Last week, US initial jobless claims came out below the market consensus, falling to 269 000. The consensus is looking for a limited uptick to 275 000. We see upward risks as more seasonal weather (colder) might lead to more layoffs in the construction sector. So, the data might be mixed, maybe slightly USD supportive. The EU summit about the place of the UK in EU might (temporary) become a factor for global market sentiment.

It will be interesting to see whether oil and equities can sustain their rebound. If so, it supports core/US bond yields and the dollar. The jury is still out, but for now there is no indication of a U-turn on the risk-on rebound. We started the week with a cautiously USD positive bias, with the 1.1060/70 area as a potential short-term target. The USD rebound is not spectacular, but we maintain our cautious USD positive bias.

From a technical point of view, EUR/USD broke above the 1.1060/1.1124 area (15 Dec top/62% retracement). This was USD negative. The 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 with room for a correction lower in the range. USD/JPY dropped below the key 115.98 pre-BOJ low. Japanese officials warned on potential action, putting a short-term floor under the pair. Even so, it remains vulnerable if global tensions resurface. Any rally might soon run into resistance . The 115.98 previous low is a first technical resistance.

Sterling in wait-and-see modus ahead of EU summit

On Wednesday, sterling was initially on the defensive. Global sentiment was cautious, oil declined while the uncertainty on the EU/UK negotiations was also negative for sterling. EUR/GBP filled offers in the 0.7845 area early in Europe.
However, the context gradually become became more ‘sterling-friendly’. Oil and equities rebounded and the UK labour report was strong. The unemployment rate remained at 5.1%, but employment reached a record high. Weekly earnings growth was modest, but slightly higher than expected. EUR/GBP corrected already lower ahead of the labour report. The decline was extended to test the 0.7760 area. Part of this move was due the a decline of EUR/USD. Cable rebounded from the mid 1.42 area to the 1.4335/40 area after the labour data. However, the pair showed no clear trend and closed at 1.4294 (from 1.4306). EUR/GBP also ended the session little changed at 0.7786 (from 0.7789).

Today, there are no important UK eco data . So, sterling traders can focus on the EU summit, discussing the terms for the UK to stay in the EU. Markets still see an agreement as the mostly likely scenario. If this comes true, sterling might rebound, but the internal debate in the UK will continue. No deal will cause more losses for sterling, but may also cause losses for the euro against the likes of the yen and the dollar. We stay cautious on sterling until there is more clarity on the EU/UK negotiations as there is too much binary risk. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. First 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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