Focus on UK labour data and budget statement

Fed to decide on next directional USD move

Yesterday, the market shifted into a cautious risk off modus which was negative for USD/JPY. EUR/USD again didn’t show a clear trend. Even poor US retails sales failed to give guidance. EUR/USD held close to the 1.11 handle and finished the session little changed at 1.1109. USD/JPY dropped intraday to the 112.65 area, but rebounded later to finish the day at 113.18 (from 113.82).

This morning, Asian equities trade mixed with Japan underperforming and China outperforming. Chinese Premier Li admits that the economy is facing headwinds but reiterated that the new growth targets are achievable and that China will avoid a hard landing. BOJ’s Kuroda said the bank has several options to ease policy further, including interest rate cuts, an expansion of the monetary base and more buying riskier assets. He said that negative interest rates help to weaken the currency and could eventually go to -0.5%. It had only a limited trading impact, as markets are not convinced of further aggressive BOJ rate cuts. USD/JPY is trading marginally higher at 113.40. Oil is little changed. AUD/USD stabilizes in the mid 0.74 area. EUR/USD maintains a tight range in the 1.11 area.

Today, the focus will be on the FOMC meeting, but also the US data are interesting. US CPI inflation is forecast to have slowed to 0.9% Y/Y from 1.4% Y/Y. Core inflation is forecast stable at 2.2% Y/Y. We see risks for a downward surprise, both in the core and headline reading. In February, US industrial production is expected to have dropped by 0.3% M/M following a sharp rebound in January but manufacturing production, is forecast to extend its upward trend, rising by 0.1% M/M. Especially for the manufacturing sector we see downside risks. We see upside risks for the US housing data, supported by more favourable weather conditions. A the margin, the US data might be slightly negative for the dollar (due to lower inflation), but markets will stay wait-and-see modus going into the Fed policy decision.

For an in depth analysis of the Fed-decision, see the fixed income part of this report. The Fed dots will probably guide markets for three Fed rate hikes this year rather than four. However, this is still more than the market currently discounts. Market will still have doubts on such a scenario, but the Fed’s determination to continue a gradual process of policy normalisation might keep the dollar well supported.

Of late, we advocated sideways EUR/USD trading within the 1.1200/1.0810 range. The top of this range was extensively tested after last week’s ECB meeting but for now no-follow-through USD losses occurred. 1.1376 is the next important resistance that will hold, we assume, unless the US news flow turns really negative. We look for an EUR/USD topping out process. USD/JPY perfectly holds within the 110.99/114.87 sideways consolidation pattern. 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 profit from the prospect of Fed policy normalisation going forward.

Focus on UK labour data and budget statement

On Tuesday, Brexit returned as a driver for sterling trading. A poll indicated that Brexit supporters had a small lead over the ‘remain camp’. The poll caused short-term investors to sell sterling after the recent rally. Cable dropped to the mid 1.41 area. EUR/GBP was also propelled higher even as EUR/USD traded with slight negative bias early in the session. Uncertainty on the UK budget proposal, the UK labour market data (today) and the BoE policy statement (Thursday) were additional factors to turn cautious on sterling. EUR/GBP tested the 0.7848 resistance and closed the session at 0.7850 (from 0.7763). Cable closed at 1.4151 (from 1.4302).

Today, the focus for sterling trading will be on the UK labour data and the budget statement. The UK labour market continued to perform well of late, despite signs of a slowdown in economic growth .Markets will keep close eye on wage growth. We expect a decent UK labour market report. In the budget statement, UK Fin Min Osborne will have to tighten spending, but the government will probably refrain from really tough measures ahead of the EU referendum. Even so, the headlines from the budget might be slightly negative for sterling. Last but not least, Brexit is back as a factor for sterling trading, even in the short-term. The day-to-day momentum of sterling turned again negative yesterday and this trend looks to continue this morning.

Of late, sterling bottomed out as Brexit-fears moved (temporary) to the background. For cable, the hypothesis of a bottoming out process remains in place. For EUR/GBP the picture was already damaged by Thursday’s overall post-ECB euro rebound and the pair trades currently north of the 0.7850 resistance area. This move again deteriorates the short-term picture of sterling and brings the 0.7929 correction top again on the radar. The medium-term picture of sterling against the euro remains negative as EUR/GBP holds above the 0.75 area. 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.

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