USD outperforms on constructive US data

Yesterday, USD traders were again confronted with mixed signals. The dollar was well bid early in the session and the euro suffered from lingering uncertainty on Greece. In the US, the dollar made a temporary setback after poor US spending data but a new USD up-leg started after a strong US ISM. Especially USD/JPY profited and jumped to the high 124 area. EUR/USD dropped temporary below the 1.09 barrier too. The euro finally regained some ground as headlines about a meeting of the Greek creditors fuelled hope that a debt deal might be reached in the near future. USD/JPY closed the session at 124.77 (from 124.15). EUR/USD ended the day at 1.0927 from 1.0986. So, at the end of the day dollar strength prevailed.

‘Final’ Greek negotiations to set the tone for trading?

This morning, Asian equities mostly show moderate losses. So, the USD rally this time didn’t trigger any further gains. USD/JPY even jumped briefly north of 125, but is currently back in the 124.60 area. EUR/USD is little changed, trading in the 1.0930 area. The RBA this morning kept its policy rate unchanged at 2.00%. The RBA sees the economy operating with a degree of spare capacity for some time. Inflation remains consistent with the target. The Aussie dollar has declined but a further depreciation is seen as likely and necessary. The RBA didn’t give much guidance on further policy steps. AUD/USD yesterday rebounded from the 0.7620 area to the 0.7680 area.

Later today, the calendar in Europe contains the German Labour market data and the EMU CPI. There is a (big) risk of a higher headline EMU CPI. Normally, we wouldn’t expect a big reaction of the euro. However, given the ‘strange’ rise in European bond yields yesterday evening, we keep a close eye on the market reaction. After yesterday’s meeting of the creditors of Greece, there will probably again be a lot of rumours. The creditors apparently made Friday the deadline for reaching an agreement. So, the pressure and the nervousness are rising. Greece remains a binary risk of the euro. The intraday headlines might be negative, but who wants to be short euro as the deadline for an agreement is coming very close? So, more erratic trading around the recent levels in EUR/USD looks likely as long as there is no outcome. Even in case of an agreement, we expect any rebound of euro to be rather short-lived. After a Greece driven uptick, the focus might soon return to the US eco data. Of course, there is no guarantee that the Greek issue will be solved before the payrolls.. The downside in EUR/USD might be rather well protected going into the Friday deadline. At the same time, USD/JPY continues to find support from higher core bond yields. Even so, we don’t jump in at the current levels.

Longer term, we maintain a cautiously positive bias on the dollar. Recently, the dollar developed a bottoming out process. Interest rate differentials tentatively moved again 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, stalled. The topside of the euro should be well protected, even as Greece might trigger some strange, wild swings. 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 remains favoured.

Sterling drifting lower after disappointing PMI

Yesterday, sterling lost ground after a disappointing UK manufacturing PMI. The move was in the first place visible in cable. The pair first dropped to the 1.52 area after the publication of the UK PMI. Later in the session, cable even filled bids in the 1.5171 area, but this was due to USD strength after the US ISM. Cable closed the session at 1.5201 (from 1.5291).The picture in EUR/GBP was a bit more diffuse. The pair initially declined on euro weakness, but rebounded later. This was in the first place sterling weakness, but the euro was better bid later in the session, too. EUR/GBP closed the session little changed at 0.7189 (from 0.7186).

Later today, the UK money supply and lending data, and the construction PMI will be published. We expect today’s eco data to be only of intraday significance for sterling trading. Tomorrow’s UK services PMI is the next important reference for sterling trading. For now, sterling is in correction modus and we don’t see a trigger for a reversal right now.

Until mid-May sterling remained in good shape even as expectations for a BoE rate hike are pushed back to 2016. Despite constructive sterling momentum, we had the impression that enough good news was discounted. Last week’s price action indeed suggested 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.