Sterling rebound shifting into a lower gear?

USD/JPY continues ‘record-race’

There was no clear guide for global markets trading yesterday. The dollar traded slightly weaker early in Europe, but found again a better bid as US traders joined the action. Later in US dealings the dollar finally lost some ground. A limited decline in US bond yields after the auction might have played a role. Comments from Japanese FM Aso, denominating the current yen drop as ‘rough’, triggered a setback in USD/JPY, too. USD/JPY closed the session at 123.95, still higher than Wednesday’s close at 123.66, but off the 124.46 top. EUR/USD closed the session at 1.0949.

US eco data in focus.

This morning, most Asian equities show very limited gains. Japan CPI data (0.6% Y/Y for the headline) were close to expectations. Labour market data suggest a further tightening of labour market conditions. USD/JPY trades in the 123.75 area. So, the pair is off the cycle top, but little changed from yesterday’s level in Asia. So, is the Nikkei. EUR/USD is holding near yesterday’s highs. Comments from IMF’s Lagarde yesterday evening that a Grexit is a possibility don’t affect euro trading. EUR/USD is currently trading in the 1.0950 area.

Later today, the EMU money supply and lending data are interesting, but the currency market seldom reacts to this release. In the US, the calendar contains the revision of the Q1 GDP, the Chicago PMI and the final Michigan consumer confidence. The consensus expects a downward revision of Q1 growth (from 0.2% to -0.9%). There is a lot of statistical noise around this release. We don’t have a strong view on the outcome, but the dollar might profit in case of a positive surprise. We see upside risks for the Chicago PMI and for the Michigan confidence, too. So, the data might be (slightly) USD supportive today.

Finally, Greece will also stay in the headlines. Greek officials say they look for an agreement by Sunday, but the creditors look less convinced on this scenario. An agreement could be a temporary positive for the euro, but we don’t bet on this going into the weekend. So, we start the day with a USD positive bias (EUR/USD negative). For USD/JPY we look how far the rally goes. Japan Fin Min said that forex was not discussed at the G7, but we have the impression that both US and Japanese officials agree that the move has gone far enough for now. Of course, this doesn’t make USD/JPY immune for higher US interest rates or good US eco data. Even so, we turn more cautious on the upside of USD/JPY.

Recently, the dollar was strong on rate hike hopes and the euro was in the defensive as political uncertainty came again to the forefront. We don’t see this context to change short-term. Even so, the dollar rally might take a breather after recent gains until there is more confirmation from strong US eco data. Today’s data might go (a bit) that way.

Longer term, we maintain a cautiously positive bias on the dollar. Since last week, the dollar developed a bottoming out process. Interest rate differentials are again moving slightly in favour of the dollar and the US eco data were moderately constructive. At the same time, the decline of the bund, which supported the euro early this month, has stalled. The topside of the euro should be well protected. We assume that EUR/USD 1.1534 (early February top) will be difficult to break. A sustained further rebound of the dollar needs confirmation that the US Q1 dip was temporary. This might take time. A EUR/USD sell-on upticks approach remains favoured.

Sterling rebound shifting into a lower gear?

Yesterday, the second reading of the UK GDP was slightly disappointing. This triggered a setback of sterling. EUR/GBP extended Wednesday’s rebound and closed the session at 0.7148 (from 0.7101 the previous day). Cable even dropped temporary below the 1.53 big figure, but rebounded later in in the session as the dollar returned earlier gains across the board. Cable closed the session at 1.531680 (from 1.5453 at the close).

This morning, the UK GFK consumer confidence disappointed. A stabilisation (4) was expected, but the index declined to 1. Until now there was hardly any negative reaction from sterling. Later today, there are no important UK data. So, sterling traders will have to look for guidance to price moves in the dollar/euro.

Recently, sterling remained in good shape even as expectations for a BoE rate hike are pushed back to 2016. The short-term momentum was sterling constructive, but we had the impression that enough good news is discounted.
Yesterday’s price action indeed suggests that enough good news was discounted for sterling and that the UK currency is ripe for consolidation/profit taking. The EUR/GBP 0.7014 cycle low looks a tough support for now. We look to sell EUR/GBP, but wait for a more pronounced up-tick.