Sterling rebound slows

EUR/USD losing slightly ground ahead of the FOMC

Yesterday, EUR/USD drifted lower in the 1.11 big figure In technical, eco and event-poor trading,. The pair closed the session at 1.1103 (from 1.1156 on Friday). USD/JPY held a tight sideways range in the upper half of the 113 big figure. The pair finished at 113.82 little changed from Friday evening (113.86).

This morning, Asian equity markets trade with moderate losses. The BOJ, as expected, kept its policy rate (-0.1%) and expansion of the monetary base unchanged. BOJ stays in wait-and-see modus, as it is assessing the impact of negative interest rate on the economy and the financial system. The BOJ was slightly more cautious on the economy citing weak exports and production. It reiterated it could do more of needed. Japanese equities lost slightly ground and the yen strengthened after the BOJ announcement. USD/JPY trades currently in the 113.35 area. Oil also remains under slight downward pressure (Brent near $39 p/b). The decline/consolidation in oil and other commodities is capping the rebound in commodity currencies. AUD/USD returned below the 0.75 mark. EUR/USD shows still no clear trend, as it holds in the low 1.11 area.

Today, the focus will be on the US data. Following strong retail sales in January, a more modest payback (-0.1% M/M ) is expected, but the control group, which excludes autos and gasoline station sales, is expected to have increased by 0.2% M/M (0.6% M/M in January). We believe that the risks are for a stronger outcome. PPI inflation is expected to have picked up from -0.2% Y/Y to 0.1% Y/Y. Core PPI, however, is expected to have increased by 0.1% M/M, which should push the annual rate up to 1.2% Y/Y from 0.6% Y/Y. We have no reasons to distance ourselves from the consensus. We see also upward risks for the US Empire State manufacturing index and the US NAHB housing market sentiment. Decent US retails sales and an uptick in the PPI might be USD supportive even as investors will keep a cautious approach ahead of tomorrow’s FOMC decision. Given the soft market positioning, the risk for the Fed is to be less dovish than expected, keeping the USD downside supported.

Of late, we advocated sideways EUR/USD trading within the 1.1193/1.0810 range. The top of this range was extensively tested after last week’s ECB meeting but for now no-follow-through USD losses/euro gains occurred. 1.1376 is the next important resistance. We assume that this level will hold, unless the news flow from the US would turn really negative. We look for an EUR/USD topping out process.

USD/JPY perfectly holds within the 110.99/114.87 sideways consolidation pattern. The pair still shows no clear trend, but it looks like the downside is well protected. This is partially due to market fears for BOJ action in case of a sharp rise of the yen. At the same time, the dollar might perform rather well in the run-up to this week’s Fed meeting.

Sterling rebound slows

On Monday, also sterling was captured in technical trading. EUR/USD and cable developed a similar trend. Initially, cable slightly outperformed EUR/USD, keeping EUR/GBP close to, mostly slightly below the 0.7750 barrier. The decline in the oil price initially didn’t have much negative impact on sterling. During the US trading session, sterling momentum deteriorated slightly. EUR/GBP regained a few ticks and closed the session at 0.7763 (from 0.7753 on Friday). Cable lost also slightly further ground and finished the day at 1.4302 (from 1.4382 on Friday). Sterling investors apparently take a more cautious approach ahead of the BoE policy decision (Thursday).

Today, investors will continue to adapt positions for more important events to come later this week, as today’s calendar is empty. Tomorrow, the key labour market data will be published and UK’s Osborne will present the budget. On Thursday, the BoE meets, but no material change from the February assessment is expected. In a day-to day perspective, sterling is losing some momentum. However, the move shouldn’t go far if tomorrow’s labour data show decent wage growth.

Of late, sterling bottomed out as the Brexit-fears moved to the background, For cable, the hypothesis of a bottoming out process remains in place. For EUR/GBP the picture is damaged by Thursday’s overall post-ECB euro rebound. As is the case for EUR/USD, we look for signs of a topping out process in EUR/GBP. 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 and temporary broke it last week. Finally, the test failed though. 0.7652 is the first important support level.

•  Download Full Sunrise Market Commentary Currencies