Dollar stays under (moderate) pressure

Yesterday, there were few data on the agenda in Europe and the US ones were very close to expectations. Even so, the euro came under pressure across the board pushing EUR/USD back below 1.36. The move looked like classical risk-off trade as equities and EUR/JPY were under pressure, too. A late session rebound of US equities (temporary?) blocked the downside in EUR/USD and USD/JPY later in the session.

Overnight, the dollar is under pressure across the board as US bond yields continue to drift lower. USD/JPY touched a correction low below the 101.43 support. Yesterday’s ‘risk-off losses’ of the euro didn’t last long. EUR/USD reversed yesterday’s losses and returned to the 1.3630 area on dollar weakness. Most Asian equity indices are in the red, but the losses are limited. Japan is a distinct underperformer on USD/JPY weakness. The Japanese data were not that bad with good labour market statistics and headline inflation printing at 3.7% Y/Y in May (3.4% for the core). Overall household spending recorded a substantial negative surprise, but we doubt that this was the reason behind the nervousness on Japanese markets. Japanese inflation data can be seen as an indication that the BOJ won’t have to take additional action soon. We retain than investor sentiment remains fragile going into European trading.

Later today, the confidence data from the European Commission and the German CPI for June will be published. For the EC confidence indictors a slight improvement is expected, but we see downside risks. The German harmonised HICP is expected at 0.02% M/M and 0.7% Y/Y (from 0.6% Y/Y). For this release we see upside risks. So, the EMU data should be fairly neutral for the euro. In the US, only the final Michigan consumer confidence scheduled for release. A rise to 82.0 is expected, but we are a bit cautious on the report. The report probably won’t be a big support for the dollar. Over the previous days, global sentiment on risk gradually turned more cautious. This keeps core bond yields low and weighs on the dollar. USD/JPY is the first USD cross rate to feel the heat. The picture for EUR/USD is far less clear. Yesterday, EUR/USD and EUR/JPY developed an old-fashioned risk-off decline, but the trading pattern changed later in the session. So, the jury is still on how currencies (EUR/USD) will react in case of a more pronounced risk-off repositioning. End of quarter position squaring is a potential source of additional volatility. That said, yesterday’s price action still supports the hypotheses that the topside in EUR/USD is well protected. USD/JPY is testing the 101.43 previous low. This was the last support ahead of the key 100.82/76 area.

Before the Fed policy decision, we had a cautiously negative bias on EUR/USD. In a longer term perspective, the gradual rise of the dollar against the euro will probably stay intact. However, short-term we don’t see a strong enough trigger for EUR/USD to break below the 1.3503/1.3477 support in a sustained way.
The Fed’s soft tone deprives the dollar from further interest rate support. We amended our short-term bias to neutral. The first short-term reference on the topside is seen at 1.3677. A break above that level would suggest that the current consolidation would develop towards a short-term correction. In such a scenario we expect 1.3734 to provide strong resistance. More trading with no clear direction might be on the cards, both for EUR/USD and USD/JPY. The low volatility environment in the major cross rate might be here to stay for longer.

Cable again nearing the cycle top

On Thursday, the BoE financial stability report was the key input for sterling traders. The Financial Policy Committee introduced a cap on mortgage loans compared to borrowers’ income (4.5 times). The bank also recommended tougher tests on the affordability of loans (test on the ability to repay at higher future interest rates). The measure didn’t come as a surprise and markets probably had feared tougher regulation. Tough rules could have pushed rate hike expectations further out in time, but this wasn’t the case, which is a slightly positive for sterling. EUR/GBP returned below 0.80. Of course, part of the decline was due to overall euro weakness. Cable returned north of 1.70. So, after a brief interlude after the BoE hearing before parliament, sterling is back in well-known territory.

This morning, the Hometrack Housing survey was reported at 0.3% M/M and 6.0% Y/Y (from 6.1% in May). Gfk consumer confidence improved from 0 to 1 (marginally below consensus at 2). The data are more or less neutral for sterling. Cable remains well bid in the 1.7040 area on overall dollar weakness. EUR/GBP is little changed just below 0.80.

Later today, only the final UK Q1 GDP figure is on the agenda, but we don’t expect an impact on sterling trading. Global repositioning at the end of the quarter might also cause additional nervousness in the sterling cross rates.
Dollar weakness keeps cable within reach of the correction top. EUR/GBP shows no clear direction. We don’t think that the BoE financial stability measures will do anything to prevent further sterling strength if UK data remain strong.

Recently, the decline of EUR/GBP slowed. This was primarily due to spill over effects from EUR/USD, as this cross rate bottomed out. However, the downside of sterling (both against the dollar and the euro) remain well protected, as several BoE members kept the door open for an early rate hike. Some short-term consolidation might be on the cards, especially after this week’s mixed signals from the BoE at the Parliamentary hearing. Even so, we maintain our LT EUR/GBP negative bias. 0.7755 (2012 low) is still the key reference level medium term.