Dollar hammered after soft Yellen comments

On Tuesday, USD trading initially showed no clear trend as investors awaited a speech of Fed chairwoman Yellen. Contrary to other Fed speakers of late, Yellen kept a dovish tone. She said that it is appropriate to proceed cautiously on raising interest rates. Uncertainty on the global economy, on the US inflation outlook and the risk of a strong dollar all contribute to this assessment. US yields and the dollar declined. EUR/USD gained about one big figure and closed the session at 1.1291. USD/JPY dropped from the 113.45 area to finish the session at 112.61.

This morning, most Asian equities recorded decent gains in the wake of Yellen’s soft comments. Japan is the exception with losses of about 1%, as the decline of USD/JPY weighs. Japan February production data were very weak (see headlines). The data raise recession fears and put pressure on the BOJ and the government to take additional stimulus measures. However, these considerations are not enough to weaken the yen, as USD weakness prevails.
USD/JPY trades currently in the 112.45 area. The soft Yellen speech provides only limited support to commodities. However, the Aussie dollar rebounded on overall USD weakness. AUD/USD trades in the 0.7625 area, close to the highs .

Today, the eco calendar is interesting. Germany inflation is expected to pick up from -0.2% Y/Y to 0.0% Y/Y. On a monthly basis, prices are forecast to have increased by 0.7% M/M. The bar is already high, but we still see risks for an upward surprise. EC’s economic confidence is expected to be stable at 103.8. The first estimate of consumer confidence dropped significantly, but business confidence surveys improved. Therefore we see risks for better Commission’s indicators too. The US ADP labour report is expected to show a limited slowdown in hiring to 195 000. We have no reasons to expect a slowdown in hiring with claims near multi-year lows. We see risks for an upward surprise. Stronger eco data should normally be modestly positive for the dollar.
However, especially the ADP report probably should be really good to inspire any sustained USD gains after yesterday’s soft Yellen speak. A negative surprise will most probably trigger more repositioning out of the dollar. Given this asymmetrical risk, we stay cautious on the dollar going into the payrolls. The 1.1342/76 resistance is again on the radar.

After the ECB meeting and the dovish mid-March FOMC meeting, the dollar was sold. EUR/USD broke above the 1.1200/1.0810 range. However, the USD losses remained moderate as several Fed speakers kept the door open for a rate hike, even at the April meeting. A first resistance at 1.1376 wasn’t challenged. Until now, EUR/USD traded in a range, albeit at a higher level. The risk of an test of the upper boundaries of the range is growing. 1.1495 remains the key line in the sand medium term. The soft Fed approach pushed USD/JPY temporary below the 110.99/114.87 range. The move was countered by warnings from the BOJ. Last week’s rebound is constructive and leaves the downside of USD/JPY better protected, unless risk sentiment turns outright negative again. The 114.87 range top is the first upside target.

Sterling enters calmer waters, for now…

Yesterday, in technical trade, sterling traded with a slightly positive bias. Cable initially slightly outperformed EUR/USD, pushing EUR/GBP below the 0.7850 area. The BoE’s Financial Policy Committee said the outlook for financial stability in the United Kingdom has deteriorated. “Domestic risks have been supplemented by risks around the EU referendum”. Sterling has weakened in recent months and heightened and prolonged uncertainty has the potential to increase risk premia investors require on a wider range of UK assets a technical move, the BoE raised the cyclical capital buffer for UK banks and recommended higher standards for buy-to-let financing. The reported weighed only temporary on sterling. Later in the session, cable rebound on the overall USD decline. The pair closed the session at 1.4384 (from 1.4254). EUR/GBP finished little changed at 0.7849.

Today, there are no UK eco data. Brexit polls show a diffuse picture, but suggest that the leave camp is gaining ground. For now, the negative impact on sterling is limited.

Last week, Brexit fears set sterling again under pressure. Cable declined off the 1.45 area, but a first important support at 1.4053 was left intact. EUR/GBP moved temporary above the key 0.7929 resistance, but a sustained break didn’t occur. If sustainably broken, it would additionally damage the sterling picture and open the way to the 0.8000/0.8066 area. We stay cautious on sterling long positions.

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