USD holding near the recent highs

On Monday, USD traders didn’t know which card to play and consequently shifted into a wait-and-see mode as there were no market moving eco releases. A heavy calendar later this week prevented further directional position-taking in the USD. EUR/USD and USD/JPY hovered in tight ranges with the dollar within reach of the recent highs.

This morning, Asian equities extend recent gains even as sentiment on the European and the US equity markets remained cautious yesterday. Japanese eco data were mixed to slightly worse than expected, but largely ignored. The dollar remains well bid. USD/JPY is testing the 102 mark. EUR/USD is changing hands in the 1.3430 area . So Friday’s correction low (1.3422) is within reach.

Today, the EMU calendar is empty, while in the US it contains the CS house prices and consumer confidence reports. The Y/Y rise in US house prices is expected to slow down from 10.82% to 9.9%. The disappointing recovery in the housing market was a concern for the Fed of late, but even so, this house price indictor probably won’t be a game-changer for USD trading. The US consumer confidence is a wild card and has more market moving potential even as markets are counting down to the Fed policy decision tomorrow. We see upside risks to the consensus. Recently, we had the impression that the dollar was becoming more sensitive to positive US eco data. So, a good figure could support the USD positive momentum. Of course, other issues on global markets also play a role. Geopolitical tensions are still omnipresent with the US and Europe taking additional sanctions against Russia. Not that long ago, such a context would have supported core bonds and was often a negative for the dollar. This is much less the case now. So, the odds are not that bad for the dollar. Will we go back to a situation where the dollar profits in case of global risk aversion due to geopolitical issues? At this stage, the jury is still out, but we keep an eye on it.

In a longer term perspective, the gradual rise of the dollar against the euro will probably stay intact. Last week, EUR/USD dropped below the 1.3503/1.3477 support even without a clear trigger. The move fits our long term view, but we still want a confirmation of the break as the Fed’s soft tone deprived the dollar from extra interest rate support of late. This week’s US eco data and the Fed policy statement will have an important say in this debate. We maintain a sell-on-upticks bias for the EUR/USD cross rate.

Cable fails to regain 1.70 barrier on USD strength

Yesterday, sterling traders endured a boring trading session. There was hardly any sterling specific news and no guidance from other major cross rates. Both EUR/GBP and cable hovered in narrow ranges near Friday’s closing levels.
EUR/GBP moved up and down in the low 0.79 area. Cable tried to regain a few ticks after last week’s setback as the USD rally ran into resistance and revisited the 1.70 area, but the test was rejected.

Yesterday evening, the IMF indicated that the UK monetary policy stance is appropriate for now, but that rates might needed to be raised quickly if inflation takes off. The IMF also considers to the UK currency to be overvalued by about 5-10%. The reaction of markets to then IMF assessment was limited, as usual.

This morning, cable has taken the road south again as the dollar is again well bid. A break below last week’s low (1.6962) would suggest that the topping out process is gaining momentum.

Later today, the UK money supply and lending data for June will be published. The activity data and some price data are more’ important for the BoE policy and thus for sterling trading. Even so, we keep an eye at the consumer credit data and housing related credit. A substantial negative surprise might weigh on sterling in a day-to-day perspective. Ever so, we expect that sterling trading will primarily be driven by the price action in the USD and the euro. A strong dollar might keep cable under pressure. A decline in EUR/USD might be a slightly negative for EUR/GBP, too. However, for now we don’t see a strong enough trigger for EUR/GBP to start a sustained new down-leg.

Recently, EUR/GBP stayed near the cycle lows and it even set a minor new low earlier last week. The UK news has been a bit more mixed recently, but the damage on sterling remained contained. Short-term, there is room for some consolidation of sterling against the euro. Even so, overall euro weakness may hamper a substantial rebound of sterling against the euro. So, there is no reason to go against the trend. We maintain our LT bullish view on sterling with EUR/GBP 0.7755 as a target. However, to set-up new long sterling position,s we maintain a sell-on-upticks tactic for EUR/GBP.