KBC Market Research Desk
KBC Bank
Euro weakness prevails
On Monday, USD trading showed a mixed picture. USD/JPY declined in Asia but stabilised in Europe as markets’ disappointment on the G20 was counter-balanced by a PBOC cut of the Reserve Requirement Ratio. Later on USD/JPY drifted again south after a poor Chicago PMI and as US equities turned again south. USD/JPY closed the day at 112.66 (114.00 on Friday). Still, the euro underperformed the dollar. The euro was sold from the start in Europe and came under further pressure as EMU inflation came out negative. EUR/USD finished the day at 1.0873 (from 1.0934)
This morning, the official Chinese PMI’sand Caixin PMI declined further (see headlines). Still, most Asian equity indices show limited gains as they react to yesterday’s PBOC RRR cut. The PBOC fixed the yuan stronger against the dollar at USD/CNY 6.5385. The PBOC apparently wants to reaffirm yuan stability despite yesterday’s RRR cut. The Reserve bank of Australia as expected kept its policy rate unchanged at 2%. The statement was little changed from the previous one. The Aussie dollar trades slightly softer at 0.7135. USD/JPY was under pressure early in the session, but selling eased in the low 112.20 area. The pair trades in the 112.65 area. EUR/USD is little changed in the 1.0880 area.
Today, according to the first estimate, the EMU manufacturing PMI dropped sharply from 52.3 to 51.0. Other business confidence indicators weakened too, but we see risks for a limited upward revision as the first estimate was maybe a little too pessimistic. The EMU unemployment rate is expected to have stabilized after two consecutive declines. In the US, the manufacturing ISM will be closely watched after a disappointing Markit PMI. The consensus is looking for a limited improvement, from 48.2 to 48.5. Another disappointing figure is not excluded.
So, the data might be slightly negative for the dollar, while equity sentiment will remain fragile. This context is negative for USD/JPY. However, the rebound of the yen might slow as investors become vigilant for BOJ action when the pair nears the 110.98 correction low. In past days, short-term US-German rate differential widened in favour of the dollar. It is unlikely this will continue if US data are weak. The day-to-day price pattern of EUR/USD remains negative. However, the pair declined without interruption off the 1.1376 top and is nearing support in the 1.0810/1.0711 area. We don’t row against the EUR/USD negative tide, but a slowdown might be on the cards if US eco data disappoint.
From a technical point of view, the correction high stands at 1.1376, next important resistance at 1.1495. The dollar gradually fought back. The decline below 1.1060 was a ST negative for EUR/USD and finally opened the way to the 1.0810/1.0711 support area. 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 run fast into resistance (113.77/114.87 with 115.98 January low the next resistance).
EUR/GBP: euro weakness prevails
On Monday, UK lending data were stronger than expected., but it didn’t left traces on the sterling graphs. The price action in cable and in EUR/GBP was primarily driven by the price swings in the euro and the dollar. Cable initially declined and set a new correction low in the 1.3936 area. However, the pair rebounded later, as the dollar lost ground after a poor Chicago PMI. Cable closed the day at 1.3917 (from 1.3871 on Friday). EUR/GBP was under pressure during the whole European session on global euro weakness (cf. EUR/USD part of this report). The pair dropped even temporary below the 0.78 level and closed the session at 0.7813 (from 0.7882 on Friday).
Today, the UK manufacturing PMI is expected to decline again from 52.9 to 52.3. We see slight downside risks. Of late, weak eco data or a risk-off sentiment were negatives for sterling, as was uncertainty on Brexit. Over the previous days, euro weakness prevailed as a driver for currency trading. At the same time, the news on Brexit moved somewhat to the background as a ST driver for sterling trading. Some consolidation or even a limited rebound might be on the cards after the recent decline. However, for now, it is too early to call a sterling trend reversal. We are interested to see the reaction of sterling in case of a weak UK PMI (in combination with similar poor data in the US/Europe). Will sterling still be the weakness link or is some improvement in sentiment on the cards? 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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