Dollar ignores disappointing US price data

On Thursday, the dollar rebound took a breather as the equity rally slowed and US inflation disappointed. This capped further USD gains, but the greenback quite easily maintained this week’s gains. That’s remarkable given the post-Fed weakness of late. EUR/USD closed the session at 1.1268, almost unchanged from Wednesday. USD/JPY finished the session at 109.40 (from 109.34 ).

Overnight, Chinese Q1 GDP was exactly in line with expectations at 6.7% Y/Y.
March industrial production was substantially stronger at 6.8% Y/Y. The market reaction to the data is muted. Most regional equity indices show modest losses, which is probably some short-term profit taking on recent gains. The Aussie dollar temporary gained a few ticks , but AUD/USD fails to break to new highs as the commodity rally slows. EUR/USD holds yesterday’s tight range and trades around 1.1260. USD/JPY remains well supported, trading in the 109.60 area.

Today, the eco calendar contains the US Empire State manufacturing index, US industrial production and the first estimate of April University of Michigan consumer confidence. Citigroup announces Q1 earnings, Fed’s Evans is scheduled to speak and the IMF/World Bank/G20 meetings take place in Washington. Consensus expects a limited further increase for the Empire State manufacturing index. We see risk for a stronger report. Industrial production is expected to have declined further in March, by 0.1% M/M, but manufacturing output, is forecast to show a limited increase. For both we see downside risks.
Finally, University of Michigan consumer confidence is forecast to have improved from 91 to 92 following three consecutive monthly declines. A continued improvement in labour market conditions and reports of higher wages should support sentiment. We see risks for a higher Michigan reading too. Yesterday, the dollar (and the US interest rate markets) ignored a lower than expected CPI report. Is this an indication that enough Fed softness is discounted and that the dollar is now more sensitive to positive US data surprises rather than negative ones? The jury is still out. In a day-to-day perspective, we assume that the downside of the dollar is rather well protected unless really bad news kicks in. EUR/USD and USD/JPY remain confined to tight ranges though. Even after the recent USD rebound, no key technical levels are broken. Oil and the comments from the G20 meeting are a wildcard. We maintain a cautiously positive dollar bias in a daily perspective.

The dollar lost ground after the March ECB and FOMC meetings. EUR/USD set a new 2016 high at 1.1465. However, the key 1.1495 resistance remained intact. This week’s price action suggests that the topside of EUR/USD became better protected. 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 risk aversion pushed USD/JPY below the 110.99/114.87 range. The pair reached a new correction low below 108. USD/JPY had moved into oversold territory though, so there was room for a technical rebound this week. A protracted USD/JPY rebound probably needs a sustained improvement global risk sentiment or can official talk on more BOJ easing or ‘verbal interventions’ stop the yen rebound (cf G20)? A move above 110.67 would call off the downside alert.

Sterling ignores BoE policy statement

Yesterday morning sterling lost slightly ground ahead of the BoE policy announcement. There were rumours that two policy members seriously considered a rate cut. The BoE as expected left its policy unchanged, while sounding cautious on the economy. The bank elaborated in extenso on the potential impact of a Brexit scenario on the economy and on markets. As the recent fall of sterling was presumably mostly due to uncertainty regarding Brexit, the BoE doubted that it would persist over time. If so, it should also limit its economic impact. In the end, the BoE policy decision had no lasting impact on sterling trading. EUR/GBP closed the session at 0.7960 (from 0.7937); cable finished at 1.4155 (from 1.4204)

Today, only the UK February construction output data will be published. A modest rebound after a poor January figure is expected. Any market reaction to the report will only be of intraday significance at best. So, sterling trading will be at the mercy of global market trends. For now, it looks as if the topside in EUR/GBP is better protected as long as negative headlines on Brexit are avoided.

The technical picture of EUR/GBP improved further as the pair broke above the resistance at 0.7929/31 and 0.8066. The recent sterling decline has been fast, raising the chances for a (temporary) pause, which finally occurred this week. Even so, we assume that sterling sentiment will remain fragile as long as the polls indicate a neck-and-neck race for the 23 June referendum.

•  Download Full Sunrise Market Commentary Currencies