Dollar hardly affected by risk-off correction

On Tuesday, global sentiment turned risk off. Initially, the losses on European and US equity markets remained limited. The dollar lost a few ticks against the euro and the yen but both cross rates remained in well-known territory. Later the session, a sell-off in commodity related assets put equities under further pressure. The impact on the major dollar cross rates remained moderate. USD/JPY closed the session 112.62 from 113.46, but most of the losses already occurred early in the session. EUR/USD finished the day at 1.1011, almost unchanged from Monday.

This morning, sentiment in Asia remains fragile as the fall-out from the commodity correction continues. Most regional indices trade with modest losses, with China underperforming. The focus remains on the gyrations in commodities. It is still early days, but fist indications suggest a slowdown of the sell-off in the likes of copper and oil. That said, the fall-out from the commodity correction on global currency remains very limited. This applies even to commodity currencies like the Aussie dollar. AUD/USD trades still north of 0.74 even after yesterday’s setback in commodities. USD/JPY also holds up very well given the risk-off correction. The pair trades little changed in the 112.55 area. EUR/USD dropped back below the 1.10 level overnight and trades in the 1.0975 area.

The eco calendar in the US and in Europe is almost empty. So, developments on global markets should set the tone for trading in the major currency cross rates. However, both USD/JPY and EUR/USD had good reasons to ‘ignore’ yesterday’s risk-off correction. Markets are cautious to push USD/JPY aggressively lower as the BOJ might come into play (at least verbally) in case of a return to the range bottom (111 area). EUR/USD traders stay in wait-and-see modus ahead of tomorrow’s ECB decision. Yen buying due to risk-off sentiment to some extent takes place via EUR/JPY, rather than via USD/JPY. This might be a slightly negative for EUR/USD short-term (Cf price action this morning). Investors will remember the rebound of the euro after the ECB decision when Draghi failed to fully meet easing expectations. However, the market is now much less ‘euro short’ positioned. We maintain a scenario of sideways EUR/USD trading ahead of the ECB meeting. Resistance comes in at 1.1043/68 and at 1.1193. The 1.0826/10 area marks an important support which might be difficult to break without an high profile trigger. USD/JPY is blocked in the upper part of the 110.99/114.87 range.

In the afternoon, the Bank of Canada will decide on its policy. No change is expected. Last month’s unchanged decision marked the start of quite an impressive rebound of the Canadian dollar.

Sterling rebound slows, but no real correction (yet)

On Tuesday, BoE governor Carney faced heavy headwinds from Eurosceptic members of Parliament. In a hearing before a committee of the UK Parliament, Carney (and BoE Cunliffe) made some positive comments on the deal PM Cameron reached last month. He warned also for a potential loss of business in case of a Brexit. Initially, sterling gradually lost ground against the euro and the dollar. The ‘Brexit turmoil’ in Parliament was maybe part of the reason for sterling to return some of its recent gains against the euro and the dollar. However, the correction was short-lived as sterling rebounded later in the session. Cable closed at 1.4174 (from 1.4265). The daily losses of sterling against the euro were limited. EUR/GBP closed the session at 0.7746, from 0.7721.

Today, the UK production data and the monthly NIESR GDP estimate will be published. Both industrial production (.0.4% M/M and 0.0% Y/Y) and manufacturing (0.2% M/M and -0.7% Y/Y) are expected to rebound slightly after a poor December figure. We don’t expected a big market reaction. Will sterling be able to profit in case of a better than expected production report?

Last week, sterling rebounded as the Brexit-fears moved to the background, but the rebound slowed at the end of last week. We assume that the short-term bottoming out process can continue, unless there would again be negative news from Brexit. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Short-term, EUR/GBP tested a first support at 0.7696 on Wednesday last week. A sustained break below this level would be a first indication that sterling sentiment improves.

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