Dollar decline slows, but no U-turn yet
|Last week’s trends in the dollar and the euro continued yesterday even as US markets were closed (Martin Luther King Day). EUR/USD made further follow-through gains after Friday’s break above 1.2092/1.2167, reaching a 3 year top. There was little news. Investors continued adjusting as the December minutes indicated that the ECB will probably soon prepare markets for a gradual scaling back of policy stimulation. Euro strength coincided with broader USD weakness. USD/JPY also declined further on optimistic comments of BOJ Kuroda. EUR/USD came close to 1.23 and finished the day at 1.2264. USD/JPY closed at 110.54.
Overnight, Asian markets continue the risk rally with Australia and India underperforming. Japan Fin Min Aso said that the current USD/JPY level is no problem but warned on sudden FX-moves. USD/JPY returned to the high 110 area. EUR/USD stabilizes in the 1.2265 area. ECB’s Hanson indicated that the ECB could change guidance before Summer and that it could end asset purchases in one step in September. The Yuan (USD/CNY 6.43) trades near the strongest level in 2-years. Later today, the calendar is again thin with the final German CPI and the US Empire manufacturing survey. The Empire survey is expected slightly higher at 19.0. Recent US sentiment indicators were mixed, despite the approval of the tax reform. The report will only be of intraday significance.
Global Picture. Euro strength still prevails as markets prepare for a change in policy from major central banks outside the US, including the ECB and even the BOJ. Especially the ECB is signalling a gradual turn. Looking at the fundamentals/interest rate differentials (2-y US/German spread at +250 bps), the euro rise/dollar decline has gone quite far. However, there is no trigger for a ST change in sentiment. The technicals turned USD negative as EUR/USD cleared 1.2090/1.2167 resistance. The dollar is a failing knife and there is no sign of a reversal. 1.2598 (62% Retracement) is next important resistance on the charts.
Sterling traded resilient of late, supported by hope that the EU could turn less hard in the Brexit negotiations. Today, the focus turns to the UK price data. Headline and core CPI are expected to decline slightly to respectively 3.0% Y/Y and 2.6% Y/Y. A scenario of a gradual easing of inflation might convince markets that little additional BoE action is needed anytime soon. Short term sterling sentiment was constructive of late, but we expect EUR/GBP 0.8700/60 to be a solid support.
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