EUR/USD rebound slows after slightly higher US CPI

On Friday, the dollar initially suffered from negative sentiment after last week’s weaker US eco data and Fed comments suggesting the FOMC shied away from a June rate increase. EUR/USD climbed from about 1.0750 to an intraday high of 1.0849. Later, the dollar enjoyed a limited rebounded as the US CPI release was intrinsically dollar positive. Following the euro gains earlier last week, some profit taking by euro bulls was probably also at work. However, the correction was limited. EUR/USD closed the session still slightly higher on a daily basis at 1.0806 from 1.0761 on Thursday . USD/JPY also failed to profit in a sustainable way from the CPI report as declining US equities weighted on the cross rate. The pair closed the week at 118.90

No clear impact on the dollar from Chinese stimulus

Overnight, Asian investors focus on the PBOC cutting the reserve requirement ratio by 100 basis points. This additional stimulus should help Chinese equities, but Shanghai trades flat at this moment. Most other Asian indices are in the red. So, sentiment on risk is again negative. The Aussie dollar profits (slightly) from the Chinese stimulus. AUD/USD tries to sustain north of the 0.78 barrier. USD/JPY is little changed from Friday’s close. EUR/USD is even losing a few ticks. So, there is no clear reaction from the EUR/USD or USD/JPY to the Chinese monetary stimulus.

Today’s tactics

There are only second tier eco the agenda in the US and in Europe today. We also didn’t see any clear message from the G20 meeting for trading. So, currency trading will probably still be driven by the same themes that reigned trading last week: the expectations on the timing of the Fed normalization process, the impact of the ECB bond buying on European bonds yields, Greece and global equity sentiment (in the wake of the PBOC decision). At least for now, there is no indication data one of these factors is strong enough to drive EUR/USD out of the current sideways consolidation pattern. A disappointing reaction on global equity markets on the PBOC decision might be slight negative for the dollar.

The LT dollar picture remains bullish, but the soft patch is taking longer and some Fed governors see the economy having difficulties to get escape velocity. Therefore, they will wait for longer before tightening policy. This is a dollar negative. Of course, on the side of the euro, QE will continue setting rates under downward pressure. Admittedly, EMU eco data are improving. So, this brings the EUR/USD short term more in balance. Some dollar bulls may still have to reposition and therefore EUR/USD may revisit the 1.1098 area. We see the 1.0462-to 1.1098 range as appropriate short term.

Cable tests upside while EUR/GBP remains unmoved

On Friday, the UK labour market report had market moving potential, but with the elections coming closer, the reaction on UK eco data is small or inexistent. This was the case with weak CPI data on Wednesday and Friday with strong labour market data. The pair lingers around in a tight range just below previous 0.7222 support. The break of the support could never generate a strong positive sterling momentum and thus we consider it as unimportant. In a daily perspective, EUR/USD rose to 0.7221 from 0.7205 on Thursday.

The price action in cable was more eventful on Friday. The pair followed EUR/USD higher in the morning session, cruising through the 1.50 resistance area for a 1.5054 high, but fell back after US core CPI printed a tad stronger. In late trading cable was able to move slight higher and close around 1.4960, versus 1.4934 on Thursday.

Calendar thin, election watching major preoccupation

Overnight, EUR/GBP and cable are sideways oriented. Rightmove house prices were up 1.6% M/M and 4.7% Y/Y, down from 5.4% Y/Y previously. Cable is unchanged from closing levels while EUR/GBP is a bit lower in line with EUR/USD. However, the moves are limited. The UK calendar is empty today, but the Minutes of the BOE meeting on Wednesday and UK retail sales on Thursday are worth watching. A lot attention will go to the election polls. The Minutes should be uneventful. Low inflation give the BOE leeway to keep quiet especially before the election.

Of late EUR/GBP was captured in a sideways consolidation range in the 0.7150/0.7400 area. The negative impact of the election uncertainty on sterling eased of late. The EUR/GBP shifted into a wait-and-see modus. For now, we see no trigger to break this stalemate. The uncertainty on the elections will probably prevent a sustained rebound of sterling, even in case of decent UK eco data. We see strong support in the mid 0.71/0.7150 area short-term.