Dollar still fights an uphill battle

On Tuesday, the dollar traded with a negative bias, even as risk sentiment was outright positive. Higher oil prices were a negative rather than a positive for the dollar. Poor US housing data weighed, too. EUR/USD drifted higher in the 1.13 big figure and closed the day at 1.1358 (from 1.1313 on Monday). The downside in USD/JPY is better protected, but the gains were modest given the strong equity gains. USD/JPY closed the session at 119.21 (from 108.82).

Overnight, Asian equities show a mixed picture. Japan outperforms despite poor foreign trade data (both imports and exports declined, in line with expectations). USD/JPY struggles to hold north of 109. Chinese equities underperform again, probably as markets fear rising corporate defaults and deteriorating credit quality in selective parts of the economy. The commodity rally slows. Brent oil is off yesterday’s high north of $44/barrel. The Aussie (AUD/USD at 0.7775) and the kiwi dollar (NZD/USD 0.7000) trade slightly softer this morning after setting multi-month highs yesterday. EUR/USD trades around 1.1355, little changed from yesterday’s close.

The EMU and US eco calendar is limited to US Existing Home sales. Existing Home sales are expected to have increased by 3.9% in March following a 7.1% drop in February. We see also a rise in sales, but maybe less than expected.
Inventories of houses for sale are at very low levels which might hamper the Spring selling season. Yesterday, the dollar declined further after poor US housing data. So, maybe there is also a risk for a slight negative intraday reaction. Asian markets and equity futures suggest that the risk rally may slow today. Of late, the rise in oil and equities went hand in hand with a weak dollar. However, there is no guarantee that the dollar will rebound if risk sentiment turns negative. USD/JPY might come under pressure. However, the correlation between EUR/USD on the one hand and oil and equities on the other hand was less straightforward. Our best guess for today is technical trading in EUR/USD ahead of tomorrow’s ECB policy meeting. After last month’s EUR/USD rebound, Draghi will probably try to convince markets that further easing is still possible. However, we don’t have the impression that (currency) markets play this card by shorting the euro. So, we assume more sideways technical trading near current levels.

The dollar lost ground after the March ECB and FOMC meetings. EUR/USD set a new 2016 high at 1.1465, but the key 1.1495 resistance remained intact. Last week’s price action suggests that the topside of EUR/USD is better protected.
We see no trigger for a clear directional move in EUR/USD short-term. Medium term, the dollar needs really good eco news 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, which was almost retested early this week. Japan apparently didn’t get much support at the G20 to weaken the yen via interventions. So, Japanese authorities apparently lack tools to prevent further yen strength if sentiment would turn again risk off. We don’t row against the yen positive tide for now.

Sterling rebound to slow?

On Tuesday sterling profited from the global risk on context and, to a lesser extent, from higher oil prices. The absence of negative news on Brexit (a new poll still showed a lead for the remain camp) and easing global tensions inspired more profit taking on sterling shorts. In an appearance before a committee of Parliament, BoE’s Carney maintained the recent BoE assessment on the risk of Brexit. The BoE has room to support the economy. At the same time, leaving the EU and rising uncertainty could make it more expensive to fund the UK current account deficit. The reaction of sterling to the comments was limited. EUR/GBP closed the session at 0.7885 (from 0.7923). Cable finished the day at 1.4398 (from 1.4278).

Today, the focus turns to the UK labour market data. Of late, the UK market held strong given mixed data from other parts of the economy. Markets will again keep a close eye on the wage data. Wage growth excl. bonuses is expected soft at 2.1% Y/Y. A good wage figure might be slightly supportive for sterling.
However eco developments have less direct impact on the BoE action as long as Brexit uncertainty reigns. So the impact on sterling might be modest. The sterling rebound might take a breather as the global risk rally slows.

The technical picture of EUR/GBP improved, as the pair broke above 0.7929/31 and 0.8066. The sterling decline has been fast, raising chances for a (temporary) pause, which is happening since last week. The day-to-day momentum for sterling improved of late. Even so, we assume that sterling sentiment will remain fragile as long as the referendum is a neck-and-neck race.

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