KBC Market Research Desk
KBC Bank
Dollar returning part of Friday’s gains after G20.
On Friday, the dollar rebounded against the yen and the euro. Initially, the move was supported by a positive equity sentiment. Later in the session, the dollar also profited from better the than expected US data. The US Q4 GDP was revised higher, personal spending and income data were stronger than expected and final Michigan consumer confidence was also revised slightly higher. The dollar made a nice comeback during the US trading session.
EUR/USD closed the session at 1.0934 (from 1.1018 on Thursday). USD/JJPY finished the day at 114.00 (vs 113.00 on Thursday ).
During the weekend, the G20 acknowledged that the global recovery remained uneven and that it falls short of the G20 ambition of strong, sustainable and balanced growth. However, the group didn’t decide to any additional coordinated action to address global growth fears or on financial turmoil. This morning, most Asian equity markets slid away after decent opening on G-20 disappointment. Especially Chinese equities came under heavy pressure. The PBOC fixed the yuan slightly weaker against the dollar, but this was logical given the rise of the dollar on Friday. There is also market talk of substantial PBOC action to support the yuan. Decent Japanese eco data were ignored. The pair trades currently again below the 113 level. The dollar is also losing slightly ground against the euro. EUR/USD trades currently in the 1.0945 area.
Today the consensus expects a decline from 0.3% Y/Y to 0.0% for the headline EMU HICP inflation. After the data from Germany Spain and France, there is even a risk for a negative figure. The core CPI is also expected lower at 0.9% Y/Y (from 1.0%). A soft CPI figure supports ECB’s Draghi’s case for further aggressive easing and is in theory a negative for the euro. However, question is how this will turn out in a risk-off context. In the US, we see downside risks for the Chicago PMI. So, the data probably won’t give a clear guidance for EUR/USD trading. Asian markets turned risk-off after the G20 meeting and this might spill over onto US and European markets. USD/JPY is again suffering the most. The USD/EUR currently still preserves part of Friday’s gains. The picture for EUR/USD remains inconclusive due to the risk-off sentiment, but the downward structure of last week remains in place. For now, we see some consolidation ahead of the key US data later this week. The ST bias for USD/JPY turns again negative.
From a technical point of view, the correction high stands at 1.1376, next important resistance at 1.1495. The dollar slowly fought back, but it had no strong momentum. The decline below 1.1060 was a ST negative for EUR/USD and might have opened the way to the 1.0810/1.0711 support area, but today’s risk-off is unlikely to give the dollar the needed momentum. USD/JPY dropped below the 115.98 pre-BOJ low. Japanese officials warned on potential action, putting a short-term floor under the pair. Even so, it remains vulnerable. Any rally might soon run into resistance (114.87 recent high, 115.98 January low is a next resistance).
Brexit decline of sterling slows
On Friday, sterling initially extended Thursday’s consolidation pattern as the Brexit-repositioning eased. EUR/GBP hovered sideways, mostly slightly below the 0.79 level. The pair closed the session at 0.7882 (from 0.7892 on Thursday). Cable initially rebounded north of 1.40, but the pair turned south as the dollar profited from good US eco data later in the session. Cable even touched a minor new multi-year low. The pair closed the session at 1.3871 (from 1.3962 on Thursday).
During the weekend, the risk of a Brexit scenario was mentioned as one of the risks that could be a shock for the global economy. However, for now, the impact on sterling trading is limited.
Later today, the UK money supply and lending data will be published. A further rise in lending is expected. Mortgage approvals are also expected substantially higher. Good lending data should in theory be positive for sterling, but we assume that global factors will again be dominant for GBP. At the end of last week, the Brexit decline of sterling slowed. Some consolidation or even a limited technical rebound might be on the cards after the recent decline.
However, for now, it is much too early to call a trend reversal. Sterling didn’t succeed any meaningful rebound against the euro or the dollar yet. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. The pair cleared the 0.7898 resistance earlier this week. 0.8066 is the next important resistance.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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