KBC Market Research Desk
KBC Bank
On Tuesday, EUR/USD traded in the upper half of the 1.08 big figure for most of the session. The final EMU manufacturing PMI was revised slightly higher from 51.0 to 51.2. However, after Monday’s negative EMU CPI, the euro still suffered from market speculation on a substantial ECB easing next week. Later in the session, the dollar gained further momentum as US eco data (ISM manufacturing, construction output) were better/less weak than feared and as equities succeeded a nice rally. EUR/USD closed the session at 1.0868 (from 1.0873 on Monday). The gains of USD/JPY were more significant. The pair closed the session at 114.01 (from 112.69 on Monday evening). A further rise in the oil price was an additional supportive for risky assets.
This morning, the risk-on rally continues in Asia with Chinese and Japanese indices showing strong gains of 3%/4%. Markets apparently grow a bit more confident that growth in the US and China won’t fall off a cliff. Even so, Moody’s cut the outlook on China’s credit rating from stable to negative. The rating agency mentioned uncertainty on the government capacity to implement reforms, rising government debt and declining reserves. However, the rating downgrade didn’t hurt regional sentiment. The PBOC fixed the yuan weaker against the dollar (6.549). However, the decline of the CNY and the CNH is very modest. Q4 growth in Australia was reported at a stronger than expected at 0.6% Q/Q and 3.0% Y/Y. Household consumption and construction were strong. The report suggests that there is no needed for additional RBA stimulus. The Aussie dollar rebounded to the AUD/USD 0.7240 area. The risk-on rally is pushing USD/JPY to retest the 114 area. The gains of the dollar against the euro are very limited. EUR/USD trades currently in the 1.0860 area.
Today, the ADP labour market report will be published. In January, the US ADP report and official payrolls showed a mixed picture. ADP employment held up well, but the increase in the official BLS reading halved. For February, the consensus is looking for an increase in ADP employment by 188 000, slightly down from 205 000. We see risks for a weaker outcome. Yesterday, markets reacted in a very constructive way to a slightly better than expected US ISM. Will the reaction of the dollar and of equities remain constructive in case of disappointing US labour data? In case of a softer ADP report, we assume some consolidation on the recent USD rebound as investors will look for confirmation from the ISM non-manufacturing (tomorrow) and the payrolls (on Friday). Both EUR/USD and USD/JPY are nearing first important support (EUR/USD 1.0810)/resistance (USD/JPY 114.87). We assume that more positive US eco news is needed for a further widening of the US/German interest rate differential and for a sustained further USD rebound.
From a technical point of view, the correction high stands at 1.1376, next important resistance at 1.1495. Of late, the dollar gradually fought back from the 113.76 reaction top. 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. A pause in the USD rally might be on the cards when EUR/USD nears this 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. The USD/JPY rebound is nearing a first important resistance at 114.87. The 115.98 January low the next resistance.
Sterling ignores poor UK data, at least for now
Sterling entered calmer waters earlier this week as the Brexit sell-off eased. Yesterday; the UK manufacturing PMI declined more than expected from 52.9 to 50.8. However, contrary to what was mostly the case of late, sterling this time more or less ignored the negative news. The UK currency traded with a cautiously positive bias against the euro and the dollar early in Europe and that remained the case even after the publication of the PMI. During the US trading session sterling finally lost some ground against the euro and the dollar. EUR/GBP closed the session at 0.7789 (from 0.7813). Cable ended the session at 1.3952 (from 1.3917 on Monday).
Today, the eco calendar only contains the UK construction PMI. A rebound from 55 to 55.5 is expected. We look out whether sterling will remain immune for negative news, if it were to occur. Later today, BoE’s broadband and Cunliff will speak. 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 further rebound might be on the cards after the recent decline. However, for now, it is too early to call a sterling trend reversal. 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 last 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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