KBC Market Research Desk
KBC Bank
On Wednesday, the US ADP reported marginally stronger than expected net private job growth of 214.000. However, it was not enough to support further broad-based USD gains. The dollar set a minor short-term high against the euro with EUR/USD touching 1.0826. Later in US dealings, the dollar fell even prey to profit-taking. The Fed Beige Book reporting mixed conditions across different districts might have been slightly USD negative. EUR/USD closed the session 1.0868, unchanged from Tuesday. USD/JPY ended the at 113.43, near the intraday slows (from 114.01).
This morning, sentiment on risk remains cautiously positive even as the China Caixin services PMI declined from 52.4 to 51.2. The Japanese PMI slowed too.
Investors assume that soft activity data will oblige authority to continue stimulating the economy. Oil and copper also maintain an upward price bias.
The Aussie dollar had a strong run yesterday and trades north of AUD/USD 0.73. A key range top (0.7386) is coming on the radar. The cautious risk-off sentiment is helping USD/JPY to reverse yesterday setback. The pair trades again in the 114.05 area. The recent EUR/USD downtrend shows a loss of momentum. EUR/USD is little changed in the 1.0865 area.
Today, the calendar is well filled. The final EMU services PMI is expected to confirm the advance reading of 53.0 in February, but we see risks for a limited upward revision. EMU retail sales are expected to have increased for a second straight month in January (consensus: 0.1% M/M), but we are more optimistic given good data from member states. The US non-manufacturing ISM will be interesting after a poor US services PMI. The consensus is looking for a limited drop, from 53.5 to 53.1. The indicator has weakened sharply in the previous two months and therefore we see risks for an upward surprise, in line with the manufacturing ISM. Finally, US jobless claims are expected to have dropped slightly to 272.000. Coming after the President’s Day week, we believe that an upward surprise is possible.
Overall constructive data are supportive for core bond yields and for the dollar. The modestly constructive equity sentiment and the bid in commodities points in the same direction.
Recent price action suggests that USD/JPY is a bit more sensitive to a USD positive context. USD/JPY might go for a test of the 114.85 short-term range top. The decline of EUR/USD shows signs for fatigue as the pair is nearing the 1.0810 support. In both cases we assume that a sustained break, if any, needs the confirmation of strong payrolls tomorrow.
From a technical point of view, the dollar gradually fought back from the EUR/USD 1.1376 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 is the next resistance.
Sterling shows signs of bottoming out
Yesterday morning, sterling was temporary captured by a new selling wave. The UK construction PMI was also weaker than expected and came on the back of a poor manufacturing PMI. Cable dropped to the 1.3915 area. EUR/GBP rebounded north of 0.78. However, sterling sellers still couldn’t gain control.
The losses were reversed by noon an sterling even rebounded later in the session. EUR/GBP tested the 0.7596 support area., but a sustained break didn’t occur. The pair closed the session at 0.7719 (down from 0.7789); Cable rebounded north of 1.40 and closed the session at 1.4078 (from 1.3952).
Today, the eco calendar contains the Halifax house prices and the UK services PMI. A moderate decline from 55.6 to 55.1 is expected. We continue to watch whether sterling will resist more negative eco news. A big negative surprise will probably slow yesterday’s rebound of sterling. Even so, we have the impression that the Brexit theme is gradually losing its negative spin on sterling. In case of good UK eco data, the positive reposition of sterling might continue.
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 week. 0.8066 is the next important resistance. On the downside, the pair yesterday tested a first support at 0.7596. A sustained break below this level would be first indication that sterling sentiment improves.
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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