Dollar still looking for guidance

On Monday, USD trading developed in well-known territory as there were no important data. EUR/USD held a tight range near 1.14 for most of the session. The pair spiked to the mid 1.1450 area on rumours of a rift between the ECB and the German Finance Ministry on the ultra-easy monetary policy. However the gains could not be sustained. EUR/USD closed the session at 1.1408 (little changed from 1.1399 on Friday). USD/JPY rebounded off the recent lows due the a decent equity sentiment, but showed also no sign of a sustained rebound. The pair finished the session at 107.94 (from 108.07).

Overnight, Asian equities are mostly positive oriented despite a weak WS close. China underperforms today and Japan outperforms. Japanese equities rebound as the rally of the yen is running into resistance. USD/JPY trades in the 108.35 area. Oil is holding in the high $ 42 p/b but with little direct impact on currency trading. EUR/USD is almost unchanged from yesterday morning, changing hands in the 1.1405 area.

The eco calendar remains thin today with only US NIFB small business confidence and the US import prices on the agenda. EU General Affairs Ministers meet and Fed’s Harker, Williams and Lacker are scheduled to speak. In February, US NIFB small business confidence dropped unexpectedly from 93.9 to 92.9. For March a pick up to 93.7 is expected. We see upside risks following substantial improvements in other confidence indicators. The report, at best, has only intraday significance for USD trading. Import prices are expected to rise by 1.0% M/M, but (currency) markets will look at the PPI and CPI to assess price developments. So, US data might be marginally positive for the dollar, but we don’t expected any sustained directional move. In Europe, there will be plenty of analysis on the Italian Bank plan, but it is no big issue for euro trading. Global risk sentiment and, to a lesser extend oil, will probably remain the drivers for intraday currency trading as market look out for the US retail sales and PPI (tomorrow ) and the CfPI (Thursday). First US corporate results later this week (especially banks) and official’s comments ahead of the G20 meeting at the end of the week have also potential to unlock the FX stalemate. So, more technical trading can be expected as global markets await more concrete eco data. USD/JPY struggles to rebound from the recent lows.

After the March ECB and FOMC meetings, the dollar was sold. Subsequently, the EUR/USD 1.1376 resistance was broken after soft comments from Yellen. EUR/USD set a new 2016 high at 1.1454. The 1.1495 resistance is important medium term, but is left intact for now. We see no trigger for a clear directional move in EUR/USD short-term. Medium term, the dollar probably needs really good news from the US to regain substantial ground. The soft Fed approach and the risk-off sentiment pushed USD/JPY below the 110.99/114.87 range. The pair set a new correction low below 108 and this level was retested yesterday. A sustainable USD/JPY rebound is difficult as long as risk sentiment remains fragile. We look whether official talk on more BOJ easing or ‘verbal interventions’ can stop the yen rebound. USD/JPY has moved into oversold territory. So, there is room for a technical rebound/consolidation.

Sterling off the recent lows

On Monday sterling succeeded a remarkable rebound. Soon after the European open, sterling jumped sharply higher. We didn’t see any news to explain the move. There were rumours about a big buying order (short-squeeze in GBP/JPY). The move, via crosses, also affected other sterling cross rates. Aside for the GBP/JPY story, investors maybe also wanted to offload sterling short exposure going into today’s UK price data and ahead of the BOE policy announcement later this week. Whatever the reason, EUR/GBP dropped temporary below the 0.80 barrier and closed the session at 0.8011 (from 0.8067). Cable rebounded from the low 1.41 area and closed the session at 1.4239 .

Today, the UK eco calendar contains the UK price data. Headline CPI is expected at 0.3% M/M and 0.4% Y/Y. Core CPI is expected to rise from 1.2% Y/Y to 1.3% Y/Y. Of late, UK eco data usually had only a very limited impact on sterling trading as the focus was on the Brexit story. This will probably remain the case until June 23. That said, it will be interesting to see the reaction of sterling in case of higher than expected price data. We have the impression that the market turned a bit more cautious on sterling shorts ahead of the BOE meeting. So, a further temporary sterling rebound is possible in case of higher CPI data.

The technical picture of EUR/GBP improved further as the pair broke above resistance at 0.7929/31 and at 0.8066. The recent sterling decline has been fast, which heightens the chances for a (temporary) pause. Even so, we don’t try to catch a falling knife and remain cautious on sterling longs.

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