USD drops below important support, as Fed sounds soft

On Wednesday, the euro jumped higher supported by rising European bond yields.
The dollar came under additional selling pressure as US Q1 GDP missed (already poor) market expectations. EUR/USD already cleared the 1.1052/98 resistance area ahead of FOMC policy decision. The market clearly anticipated a soft statement.
The Fed was indeed soft in its policy assessment, as it openly acknowledged the recent loss of momentum in economic activity (see FI part for extensive review).
However the dollar fell prey to a moderate sell the rumour , by the fact reaction.
EUR/USD returned from the highs in the 1.1188 area to close the session at 1.1128 ( from 1.0981 on Wednesday evening). The daily loss in USD/JPY was contained.
EUR/JPY and to a less extent also USD/JPY, were supported by the rise in core bond yields.

This morning, the BOJ kept its policy unchanged. Markets now look out for the policy statement and the BOJ’s assessment for inflation and growth going forward. The BOJ will probably indicated that there is still a decent chance that the inflation target will be met in a somewhat longer term perspective. Even so, the impact on the yen is limited. The price action in USD/JPY is mainly driven by the swings (recent rise) in core bond yields. This rise is protecting the downside in the likes of USD/JPY and EUR/JPY. After yesterday’s sharp swings. EUR/USD has found a new equilibrium in the 1.11 area. USD/JPY still shows limited price swings and is trading in the 118.60 area. Overnight, the Reserve Bank of New Zealand kept is policy rate unchanged at 3.50%. However, the Bank indicated it will keep rates at a stimulatory level and might cut them if demand or price weakens to levels lower than consistent with the target. The Kiwi dollar dropped from the 0.77 area to the 0.76 area.

Dollar decline to slow as the Fed is off the radar?

Today, the calendar is again interesting. In Europe, the EMU CPI estimate, the EMU unemployment rate, the German labour market data and the Spanish Q1 GDP growth will be published. We see upside risks for EMU inflation and also Spanish growth might be strong. Both factors might be slightly supportive for the euro. There are also indications that Greece and its creditors are making progress in their negotiations on a deal. In the US we keep a close eye on the Employment cost index and the jobless claims. Also here we see upside risks (better than expected for both indicators). So, the impact from the data on EUR/USD looks balanced.

Over the previous days, the dollar was on the defensive especially against the euro. Investors reduced USD long positions as they anticipated a poor US Q1 GDP report and a soft Fed assessment. The prepositioning was justified by the facts. EUR/USD broke above the .1052/(98) resistance area. From technical point of view, this is an important warning signal for dollar longs. The trade-weighted dollar dropped also below the high profile 96.17 support level, painting a multiple top configuration on the charts. So, the technical picture for the dollar clearly deteriorated. For EUR/USD, 1.1534 (early February top is the next high profile reference on the charts). Even as the MT technical picture turned less USD positive, we don’t have the impression that the dollar is already ripe for further follow-through losses right now. If the US eco data stop surprising on the downside/surprise on the upside, there might even by room for a USD rebound in a daily perspective. Over the previous days , the rise in core bond yields supported the dollar more than the euro. This is also far from evident that this pattern will continue. So, we turn more neutral on the USD a MT perspective. The dollar needs better data for a sustained comeback. In a daily perspective we expect the dollar decline the halt. ECB QE and the negative deposit rate remain a structural cap on the upside potential of the euro, too.

EUR/GBP tests 0.72 big figure

On Wednesday, sterling trading was mostly order driven and at the mercy of the global price moves in the euro and the dollar. Sterling was well bid at the onset of the European trading session with EUR/GBP trading in the 0.7135/40 area. However, the rise in European bond yields propelled EUR/USD higher. Cable this time underperformed EUR/USD. The UK CBI retail sales were slightly below consensus, but as was the case earlier this week, disappointing UK eco data were again no big issue for sterling trading. EUR/USD continued to outperform cable after the publication of US Q1 GDP. EUR/GBP jumped to the 0.7225 area, but the rally slowed as EUR/USD declined after the Fed statement. EUR/GBP closed the session at 0.7208. Cable closed the day at 1.5414 on broad-based USD weakness.

This morning , UK GfK consumer confidence stabilized at 4, exactly in line with expectations. EUR/GBP is off yesterday’s highs in line with the correction/decline of EUR/USD. There are few other important eco data on the agenda in the UK today.
So, sterling trading will again be driven by the price swings in the dollar and the euro. For EUR/GBP we see room for a technical downward correction in a daily perspective.

Of late, EUR/GBP was locked in a sideways range in the 0.7150/0.7400 area. The negative impact of election uncertainty on sterling eased of late. Last week, sterling broke temporary out of the established ST range (0.7150 area) on positive BoE minutes. This test is still ongoing. Sentiment on sterling is fairly constructive, but we maintain the view that further sustained sterling gains will be difficult ahead of the elections.