Sterling shows indecisive picture as rebound slows

Dollar weakens further

On Monday, USD weakness persisted from the European opening, even without hard news and ahead of the US manufacturing ISM. EUR/USD already tested the 1.1495/1.15 resistance intra-day and finally cleared the hurdle as the ISM printed weaker than expected. The break didn’t spark aggressive follow-through USD losses though. EUR/USD closed the session at 1.1534 (from 1.1451 on Friday). USD/JPY finished the day little changed at 106.41.

Overnight, the China Caixa manufacturing PMI declined from 49.7 to 49.4, but no lasting reaction of Asian/even Chinese equities. Most Asian equities trade with modest gains. The RBA cut its policy rate by 25 basis points to 1.75%. The rate cut was executed as inflation remained lower than forecast and as the appreciation of the Aussie dollar was complicating the economic adjustment.
AUD/USD dropped from the 0.7720 area and trades currently in the 0.7565 area. Japanese markets are closed, but It doesn’t prevent further USD/JPY losses. The pair is testing the 106 big figure. Selling pressure from AUD/JPY after the RBA rate cut s filtering through in USD/JPY. EUR/USD is little changed from yesterday’s close in the 1.1535 area.

The eco calendar is empty today. However, the EC’s Spring economic forecasts might be interesting. EC growth and inflation forecasts are still above the ECB’s most recent projections. Therefore there is also room for a downward adjustment in the Commission’s forecasts. Attention might also go to the fiscal situation of the peripheral countries as there might be a substantial slippage. In theory, lower growth and inflation forecasts and negative headlines on the periphery might be (slightly) negative for the euro; However, it is unlikely that this well counterbalance that USD negative sentiment that currently reigns.

In a daily perspective, there are no strong drivers for USD trading. Some consolidation on the recent USD decline might be on the cards. However, there is no reason to row against the USD negative tide without a clear trigger (better US data and/or less soft Fed comments), which won’t be available today.

Technically, EUR/USD finally broke above the 1.1495 MT range top yesterday, mirroring broad-based USD weakness. Yesterday’s break above 1.15 is an important technical warning for further dollar losses and opens the way for a retest of the key 1.1712 2015 high. We maintain the view that the US economy is strong enough to allow the Fed to implement the two pre-announced rate hikes later this year. This is not discounted in the interest rate markets and the currency market. However, for now there is no trigger for the market to change his mind. In this context, some further by default USD selling might be on the cards short-term. The soft Fed approach, pockets of risk aversion and the Treasury report on currencies pushed USD/JPY to a new correction low at 106.14 on Friday and this level was again broken this morning. The inaction of the BOJ keeps the downside in USD/JPY fragile. Verbal interventions from Japan to stop the rise of the yen are likely, but we doubt they will change the trend.
USD/JPY remains some kind of a falling knife.

Sterling shows indecisive picture as rebound slows

On Monday; in thin technical trade (UK markets were closed for the May Day holiday) sterling remained well bid. This was especially the case against a weak dollar. Cable initially even outperformed EUR/USD. The pair set new highs north of 1.4668 range top, reaching the highest level since Jan 05. The pair closed the session at 1.4673. EUR/GBP temporary fell to the 0.7820/25 area, but rebound as cable didn’t follow the EUR/USD rebound after the US ISM release. EUR/GBP closed the session at 0.7861 (from 0.7836).

Today, UK April manufacturing PMI is expected to rebound marginally from 51.0 to 51.2. We see downside risks. Of late, UK eco data had no lasting impact on sterling trading. A really poor figure might be a negative for sterling, especially against the euro.

The technical picture of EUR/GBP improved as the pair broke above the mid 0.79 area. A counter move occurred over the previous two weeks and threatens to deteriorate the picture again. The drop below 0.7830 was s a first warning. A move below 0.7684 (38% retracement/previous lows) would make the technical picture again neutral. Sterling had a nice rebound, but sterling sentiment will remain fragile as long as the referendum outcome isn’t clear.
More sterling gains might become difficult from current levels.

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