Dollar looking for a bottom as equity sell-off eases

On Tuesday, global markets initially rebounded from Monday’s risk-off session. This reversal was also visible in the currency market. Even so, the price action was no exact mirror image from Monday. In European trading, the dollar regained most of the Monday’s losses against the euro with EUR/USD returning to the 1.14 barrier. USD/JPY traded also off Monday’s lows, but failed to regain the 120 barrier in a sustainable way. A late session setback in US equities put again pressure on the dollar. USD/JPY closed the session at 118.83 (from 118.41 on Monday). EUR/USD closed the day at 1.1567 from 1.1619.

Overnight, the PBOC easing announced yesterday initially failed to inspire a convincing rebound in Chinese and Japanese equities. However, sentiment improved later in the session. Most Asian indices currently show decent gains. The intraday rebound of Asian equities supports the dollar, reversing part of yesterday evening’s rebound of the yen and the euro. EUR/USD is drifting back below the 1.15 barrier. USD/JPY tries to fight back higher in the 119 big figure.

Today, there are no data with market moving potential in Europe. In the US, the mortgage applications and orders for durable goods will be released. The durables are notoriously volatile. We see downside risks to the consensus.
Yesterday, equities and the dollar didn’t profit from a strong US consumer confidence release. In the current environment we don’t see any positive reaction from equities or the dollar in case of a poor figure.

As was the case yesterday , sentiment on global markets will remain the key factor for trading in the major dollar cross rates. This morning, the odds for equities and for the dollar don’t look that bad as some calm returns to Asian markets. Of course, yesterday evening’s price action in the US illustrates that sentiment cane change very rapidly. On Friday and Monday, we found that the dollar was hit quite hard by the risk-off sentiment, especially given the moderate decline in core/US bond yields. Yesterday, the dollar was in better shape, especially against the euro. The performance of USD/JPY was less convincing. Yesterday, we already indicated that the dollar preserves quite substantial interest rate support. Combined with yesterday’s USD constructive price action, this ongoing interest rate support (especially at the short end of the curve) suggests that markets still don’t exclude the possibility of a Fed rate hike in the near future. This could help to put a floor for the dollar short-term, especially if equities would finally enter calmer waters. The hypothesis that the recent lows in USD/EUR (high in EUR/USD) and USD/JPY might provide (decent) support is gaining credibility. In a short-term perspective, a cautious buy-USD on dips strategy can be considered, especially against the euro (sell EUR/USD on upticks). Even so, tight stop-loss protection remains warranted.

In a longer term perspective, EUR/USD broke beyond the 1.1534 resistance (post-ECB QE top). This level was/is an important reference for our LT term EUR/USD short bias, which is now seriously questioned. The rebound in EUR/USD is in the first place driven by global market factors (risk-off sentiment) rather than fundamental economic news from the US or from Europe. We think that the economic context hasn’t changed in such a way that the prospects for monetary policy in the US and in Europe call for a big change in fortunes in favour of the euro and against the dollar. That said, the risk-off logic can still pop up for a while. A topping out process in EUR/JPY might help to cap/slow the upside in EUR/USD too, even in case of more risk-off behaviour.

EUR/GBP rally running into resistance

On Tuesday, sterling performed quite well during the European trading session. The euro corrected gradually off Monday’s highs and this move was also visible in EUR/GBP. The pair traded in the 0.7350 area at the start of the European session and dropped below the 0.73 barrier after the PBOC easing. However, later in the session, risk-off sentiment supported the euro again. EUR/GBP closed the session at 0.7341 (from 0.7365 on Monday). Cable initially held near the recent highs in the low 1.58/high 1.57 area even as the dollar was better bid across the board. However, late in European dealings cable suffered from the USD rebound too. The pair closed the session at 1.5687 (from 1.5576 on Monday).

Today, the UK calendar is moderately interesting with the UK loans for house purchases and the CBI distributive trades survey. The data are interesting but often have only a moderate impact on sterling trading. Expectations on a BOE rate hike are also in the first place driven by global market factors. Yesterday’s price action in sterling was a bit erratic. Even so, we have the impression that the topside in EUR/GBP is growing better protected, with important resistance in the 0.7483/0.75 area. Interest rate differentials between the euro and sterling are still substantial and in favour of the UK currency. A cautious sell-on-upticks approach can be considered.