USD holding near recent lows ahead of the payrolls

On Thursday, the dollar remained on the defensive, especially against the euro. Some additional fall‐out from the soft talk of Fed’s Yellen earlier this week was still at work. Intraday gyrations of the oil price played also a role. EUR/USD moved north of the 1.1376 resistance and closed the session at 1.1380 (from 1.1338 on Wednesday). The loses in USD/JPY were relatively modest. The pair finished the session at 112.57 (from 112.43).

This morning, Asian confidence indicators show a mixed picture. The official China PMI’s rebounded to 50.2 (manufacturing) and 53.8 (non‐manufacturing). The Caixin manufacturing was also stronger than expected at 49.7. The Japan Tankan business confidence points to a deterioration in business conditions across the board. Asian equities are in risk‐off modus despite signs of stabilisation in the Chinese economy which was a major source of concern of late. Japanese equities underperform with losses of over 3%. Commodities show no clear directional move . The Aussie dollar gained some ground, but the gains could not be sustained. USD/JPY reversed yesterday’s late session rebound and returned back south to the low 112 area. EUR/USD is off yesterday’s top and trades in the 1.1375 area. Again, no consistent reaction to this mornings’ data.

Today the focus is on the US data. For the payrolls; the consensus is looking for an increase in non‐farm payrolls by 205 000 (242 000 in February), still pointing to a strong labour market recovery. The unemployment rate is expected unchanged at 4.9% , but wage growth is forecast to remain subdued (unchanged at 2.2% Y/Y). We see risks for an upward surprise in the payrolls and wage growth. The US manufacturing ISM is expected to rebound to from 49.5 to 51.0. Also here, we see potential for an even stronger increase. In the euro area , the final reading of the March manufacturing PMI might be revised lower after the Brussels attacks. Over the previous days, the dollar was hit hard after the soft Fed comments. So, substantial Fed softness should already be discounted in US bond markets and in the dollar. That said, EUR/USD yesterday broke a first key technical level, suggesting ongoing underlying USD weakness. A strong payrolls report (which is our favoured scenario) should be able to stop the downside correction of the dollar. At the same time, we continue to see an asymmetrical risk. A mediocre or a weaker than expected report still might see some followthrough USD selling building on Yellen’s soft comments.

After the ECB meeting and the dovishMarch FOMC meeting, the dollar was sold. EUR/USD broke above the 1.1200/1.0810 range. Initially, the USD losses were moderate as several Fed speakers kept the door open for a an April rate hike.
The resistance at 1.1376 initially wasn’t challenged, but is extensively tested this week, after soft comments from Yellen. 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. Over the previous days, USD/JPY drifted lower in the range, but the losses were contained given the overall decline of the dollar.

EUR/GBP holding near recent highs

Yesterday, the stronger UK eco data temporary slowed the decline of sterling . The . UK Q4 GDP was surprisingly revised higher to 0.6% Q/Q and 2.1% Y/Y. UK money supply data were also strong. At the same time, the UK Q4 current account deficit was reported much higher than expected., but was initially ignored. Later in the session, sterling came again under pressure, also against a weak dollar. Cable finally closed the session at 1.4360 (from 1.4378) . EUR/GBP also felt some upward pressure from EUR/USD and closed the session at 0.7926 (from 0.7886). So, the recent highs are again on the radar.

Today, the Nationwide house prices and the UK Manufacturing PMI will be published. PMI confidence is expected slightly higher from 50.8 to 51.2. A slight positive surprise is possible. However, positive UK eco data were often ignored of late. So, we doubt that today’s data will be able to change fortunes for the UK currency. Sterling sentiment will remain fragile.

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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