Sterling rebound slows

Dollar in wait-and-see modus

On Monday there was no clear story for global USD trading and changes were minimal. Interest rate differentials between the US and Germany widened in favour of the dollar. EUR/USD initially drifted south even as risk sentiment deteriorated in early Europe. In technical trade during the US session, the dollar finally lost ground against most majors. EUR/USD closed the session at 1.1014 little changed from Friday. USD/JPY lost also further ground even as the Dow and the S&P held in positive territory. The pair closed the session at 113.46 (from 113.74).

This morning, sentiment in Asia turned negative. Regional data are mixed. Japan Q4 GDP was unexpectedly revised slightly higher to -1.1% annualized, but Chinese trade data, especially exports, declined an awful lot. Remarkably, the sell-off of Chinese equities slowed afterwards. The PBOC set the yuan rate stronger at 6.5041, mirroring global dollar weakness. The off shore yuan stabilized. The commodity rally is running into resistance . The Aussie dollar trades off yesterday’s multi-month top, but holds north AUD/USD 0.74.
USD/JPY dropped temporary below 113, but is now changing hands in the 113.15 area. EUR/USD is little changed in the 1.1015 area.

The eco calendar is again thin. In the euro area, Q4 GDP will most likely be confirmed at 0.3% Q/Q, but the details of the report are interesting. In the US, NFIB small business confidence is forecast to show a marginal uptick, from 93.9 to 94.0. Following slightly better US ISM’s, we see risks for an upward surprise. However, the report has seldom a lasting impact on USD trading. The EU and Turkey are said to have made progress to address the refugee problem, but the deal still has to be finished, probably at 17/18 march summit. The problem might temporary go out of the spotlights as a driver for markets.

Yesterday, dollar was captured in inconsistent, technically driven trading. In the end, it was slightly in the defensive in line with the price action at the end of last week. We started the week neutral on the USD. Asian markets suggest a risk-off start of European trading. However, of late sentiment in Asia was not always copied in Europe and/or in the US. So, the dollar might open with a slightly negative bias in Europe, but the correction shouldn’t go really far. We also keep an eye at price developments in commodities and whether it will have an impact on USD trading. Yesterday, the link was weak. Markets will also continue to count down to the ECB decision on Thursday. Investors might fear a similar reaction as in December when Draghi failed to fully meet easing expectations. However, the market is now much less ‘euro short’ positioned. We maintain a scenario of sideways EUR/USD trading ahead of the ECB meeting. Resistance comes in at 1.1043/68 and at 1.1193. The 1.0826/10 area marks an important support which might be difficult to break without an high profile trigger. USD/JPY is blocked in the upper part of the 110.99/114.87 range.

Sterling rebound slows

On Monday, there were no eco data on the agenda in the UK. Sterling trading was driven by technical considerations and by the broader USD movements. Cable slightly lost ground in line with EUR/USD but rebounded later in US on overall USD weakness. Cable closed the session at 1.4265 (1.4229 on Friday). EUR/GBP hovered sideways in a tight range close to, but mostly slightly below the 0.7750 handle The pair finished the day at 0.7721 (from 0.7732).

This morning, February BRC like-for-like sales growth declined to 0.1% Y/Y from 2.5% (0.5% was expected). Sterling is losing a few ticks against the euro and the dollar this morning. This is probably due to softer sentiment in Asia rather than the BRC data. Later today, there are no important eco data, but BoE governor Carney and BoE’s Cunliffe speak at Parliament committee on EU membership Referendum. The hearing might bring some politically sensitive issues, but markets are focused on the probability of a Brexit scenario (e.g. as mirrored in the polls) rather than on the consequences. There might be a limited negative fall-out on sterling, but we don’t expect a big impact. Last week, sterling rebounded as the Brexit-fears moved to the background, but the rebound slowed at the end of last week. We assume that the short-term bottoming out process can continue, unless there would again be negative news from Brexit.
The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Short-term, EUR/GBP tested a first support at 0.7696 on Wednesday last week. A sustained break below this level would be a first indication that sterling sentiment improves.

•  Download Full Sunrise Market Commentary Currencies