EUR/GBP drifting north of 0.85
|Dollar propelled by March rate hike bets
On Tuesday, USD trading was confined to tight ranges ahead of US president Trump's testimony before Congress. However, it didn't take till the Trump testimony for the dollar to catch a renewed bid. Late in the US session, Fed governors Williams and Dudley gave strong hints on a March rate hike, as the Fed is reaching its goals on inflation and unemployment. The dollar reversed the intraday losses against the euro and the yen. EUR/USD finished the session at 1.0576. USD/JPY closed the day at 112.77. The gains were modest, as investors might still have been cautious to place big USD bets ahead of the Trump speech.
Overnight, the focus was on the testimony of US president Trump. The US president hardly gave any specifics on the budget, tax cuts or on any other economic topic. Even so, the dollar extended its gains. The Trump speech was USD disappointing, but investors adapted positions on the rising likelihood of a March Fed rate hike. USD/JPY trades in the 113.50 area. BOJ member Sato said that the BOJ could raise the Target for the 10-year bond yield before the 2% target is reached. For now, his comments didn't help the yen. USD strength prevails. Even so, the USD gains against the euro are modest. EUR/USD is changing hands in the mid 1.05 area. Australian Q4 growth was reported at a strong 1.1% Q/Q and 2.4%. AUD/USD spiked temporary to the 0.77 area, but the move was soon reversed on overall USD strength (currently 0.7670).
Today, German HICP inflation is expected to have risen to 2.1% Y/Y in February from 1.9% Y/Y, a psychological issue in Germany. We join the consensus, but an upward surprise would increase chances for the EMU inflation to reach 2%. In US, the ISM manufacturing confidence is expected to have risen to 56.2 from 56. Recent surveys put the risk for an upward surprise (57/58?). The PCE (consumption) and PI (income) are expected to have risen 0.3% M/M each.
Attention might go to the PCE deflators. The headline is expected to have risen to 2% Y/Y from 1.6%. In that case, the FOMC could formally say that the inflation target is reached. Of late, the focus for USD trading was on US fiscal policy (Trump speech). However, at this stage, it is the Fed talk that really matters. The probability of a March Fe rate hike has risen to 80%. The rise in short-term US yields should be USD supportive. The first reaction of EUR/USD to the rise in Fed rate hike expectations is modest. Even so, in this context we can't but the start the day with a USD positive bias. The Fed rate expectations should outweigh the disappointment on any details on fiscal policy from president Trump.
Global context. The dollar corrected lower since the start of January, but bottomed out three weeks ago supported by Trump's tax promise. Underlying euro weakness due to political uncertainty in the area is a factor too. Recent Fed comments were also USD supportive. Initially, it had little impact on yields and on the dollar. However this might change as chances on a March rate hike are sharply rising. We see 1.0874 as solid resistance and favour a sell EUR/USD on upticks approach. 1.0494 is first intermediate support. The downside test of USD/JPY was rejected. USD/JPY 111.60/111.16 (Range bottom/38% retracement of the 99.02/118.66 rally) remains key support. We keep a USD positive bias longer term, as the dollar might still get additional interest support if the Fed continues its normalisation process.
EUR/GBP drifting north of 0.85
Yesterday, sterling traded again with a tentatively negative bias. EUR/GBP drifted further north of 0.85. Cable hovered in the lower half of the 1.24 big figure for most of the day.. At a hearing before lawmakers, new MPC member Charlotte Hogg faced tough questions on monetary policy, including the management of the stock of assets on the BoE's balance sheet. Her assessment and tolerance on the inflation overshoot sounded rather dovish. In the press, the Scottish PM kept the door open for a second ‘indyref', as she was unhappy on the way PM May handles the EU views of Scotland. In both cases, the impact on sterling trading was limited. EUR/GBP closed the session at 0. 8543. Cable finished the day at 1.2380.
Today, the UK manufacturing PMI is expected little changed at 55.8. Markets will keep an eye at the Brexit vote in the House of lords. UK May might lose the vote for an amendment over the rights of EU citizens living in the UK. A negative outcome might complicate the Brexit timetable. The headlines might be slightly GBP negative. The overall context of USD strength will also affect sterling trading. That said, we have the impression that sterling sentiment has softened a bit of late. So, it is difficult for cable to outperform EUR/USD as is often the case with USD strength. Early last week, the euro sell-off pushed EUR/GBP to the 0.84 area, but a sustained break lower didn't occur. There is currently no clear driver for sterling trading. Longer term, we have a sterling negative view, as the Brexit will negatively impact the UK economy. We maintain a neutral bias on sterling short-term.
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