Post-Fed USD decline peters out

On Monday , there was no clear story to guide USD trading. ECB policy makers kept a soft tone, while Fed speakers were more hawkish. At the margin, this combination was slightly positive for the dollar. US eco data were weaker than expected, but ignored. EUR/USD closed the session at 1.1241 (from 1.1270 on Friday). USD/JPY finished the day at 111.95 (from 111.55 on Friday).

This morning, Asian equities trade mixed. Japanese indices outperform, as they had some catching up to do after yesterday’s closure and as the yen is slightly weaker. USD/JPY trades in the 112.10 area, off the correction lows below 111 touched last week. Oil (Brent currently at $41,50 p/b) is holding near the recent highs. Recently, it looked like the inverse correlation between the dollar and oil was becoming tighter, but this isn’t the case now. The dollar is holding relatively strong. EUR/USD trades in the mid 1.12 area. Even commodity currencies like the Aussie dollar (0.7590) and the Canadian dollar (USD/CAD 1.3070) trade slightly off the recent highs, despite the rise in oil.

Today, the focus is on the surveys data in the euro area and in the US. Fed’s Evans (doves) is scheduled to speak. Following two monthly declines, the euro zone composite PMI is expected stable at 53.0. We see upward risks as we assume that earlier market turmoil and global growth concerns were at least partially responsible for the weakening in business sentiment. In Germany, the IFO business climate indicator forecast to have picked up from 105.7 to 106.0. Also here, we see risks for an upward surprise. In the US, we see also room for a better than expected outcome of the manufacturing PMI and the Richmond Fed index. In theory, European data should take centre stage. However, it isn’t sure that good European data will immediately translate into a stronger euro. A rise in core bond yields, if it occurs, might be slightly USD positive. In a daily perspective we still don’t see one dominant factor to guide USD trading. Oil, global interest rate developments US and European data and sentiment on risk might give conflicting signals. In this context, we expect more technical, trade in EUR/USD near current levels. Can USD/JPY can stay away from the recent lows? If so, it suggests a slightly improvement in underlying USD sentiment. Before the FOMC decision, we advocated sideways EUR/USD trading in the 1.1200/1.0810 range. However , this range top was broken after Wednesday’s soft Fed. It will take some time for the dollar to digest the U-turn in the Fed interest rate assessment. Still, we don’t expect a big sustained jump higher in EUR/USD. 1.1376 is the next important resistance. 1.1495 is the key line in the sand medium term. The soft Fed approach pushed USD/JPY temporary below the 110.99/114.87 sideways range, but the move was countered by rumours on rate checking from the BOJ. The BOJ will probably continue to send warning signals in case of a drop below 111. However, for now, USD/JPY failed to really rebound off the recent lows. We are in no hurry to go USD/JPY long as we want more confirmation that the BOJ won’t have to accept a lower USD/JPY bottom.

Sterling rebound aborted

After rebounding late last week, sterling traded again with a slight negative bias yesterday. Tensions in the UK government and uncertainty on Brexit weighed. The Rightmove house prices were strong and CBI orders improved as expected but were ignored. The pair closed the day at 1.4369 (from 1.4476). EUR/GBP traded with an upward bias and set an intraday top around 0.7838. The pair closed the session at 0.7823 (from 0.7784) despite a slight intraday loss of EUR/USD. Sterling weakness prevailed

Today, the UK calendar contains the price data (CPI, PPI, house prices) and the monthly budget data. The price data are usually the more important ones for GBP trading. UK headline CPI is expected to rebound to 0.4% Y/Y (0.4% M/M) from 0.3% Y/Y previously). Headline inflation is expected stable at 1.2% Y/Y. We see slight upward risks. Question is whether slightly higher UK inflation data will be able to support sterling. There is probably a really big upside surprise needed for markets to reconsider BoE rate hike expectations. Short-term, uncertainty on Brexit and other political issues remain key for sterling trading.

Sterling selling eased slightly, 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 damaged by the post-ECB euro rebound and the pair came close to the 0.7929 resistance. The test was rejected. If this level holds, it would be a first indication that sterling enters calmer waters also against the euro. However, this hypotheses still needs to be confirmed as Brexit uncertainty still looms. The medium-term technical picture of sterling against the euro remains negative as EUR/GBP holds above the 0.75 level. EUR/GBP broke temporary below a first support at 0.7696 , but the test failed. 0.7652 is the first support.

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