EUR/GBP still going nowhere near 0.85 barrier
|Dollar stays soft even as Fed rate expectations rise
On Monday, investors kept mostly side-lined ahead of the testimony of US president Trump before Congress today. Investor caution initially held the dollar near the recent lows. Later in US dealings, a rise in US yields reinstalled a cautious USD bid. The release of some details on Trump's budget plans and comments from Fed Kaplan probably caused this bid. Whatever the reason, EUR/USD dropped from 1.06+ levels and closed the session at 1.0587. USD./JPY finished the day at 112.70 (after trading in the low 112 area for most of the day).
Overnight, Asian equities basically stay in wait-and see modus and are divided between small gains and limited losses. Japanese eco data were mixed (retail data) to soft (production), but had no lasting negative impact on the yen. USD trading still faces conflicting signals. Futures are discounting a 50 % of a March Fed rate hike. Still, investors are uncertain whether Trump will provide enough details to continue to reflation trade. The dollar is trading off the overnight highs against the yen and, to a lesser extent, against the euro. USD/JPY is again trading in the 112.50 area. EUR/USD changes hands just below 1.06.
Today, the US eco calendar is well filled, but probably only of moderate importance for markets. US Q4 GDP is expected to be upgraded to 2.1% from 1.9%, a small change and outdated. The Chicago PMI dropped sharply in January. A rebound to 53 is expected. For the Richmond Fed business sentiment, a small decline is expected. These business sentiment surveys fall a bit short with other surveys (NY/Philly Fed, Kansas). Even so, they won't really change the broader picture ahead of the key ISM confidence tomorrow. Consumer confidence (Conference board) is expected to have declined from 111.8 to 111, still a very high level. Markets will also keep a close eye at the price indicators of the surveys. In globo, US eco data shouldn't question the continuation of the reflation trade or the scenario of a Fed rate hike in the near future. In theory that should help to put a floor for the dollar. Of course, the focus for markets will remain on Trump's appearance before Congress. For US yields and for the dollar, we look out whether Trump's message will be strong/convincing enough to keep the probability of a March rate hike at 50% (or higher). Of late, investors reduced USD longs. So, there is probably room for some USD buying on dips if Trump gives a reasonable prospect on a pro-growth policy.
Global context. The dollar corrected lower since the start of January as the reflation trade slowed down. Two weeks ago, the dollar bottomed out, supported by Trump's tax promise. Underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and favour a sell EUR/USD on upticks approach. 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. Recent Fed comments were USD supportive, but had no lasting impact on yields. We keep a USD positive bias longer term, as the dollar might still get additional interest support if the Fed continues its normalisation process. For now, the momentum of USD/EUR is more convincing than in USD/JPY.
EUR/GBP still going nowhere near 0.85 barrier
Yesterday, sterling traded with a slightly negative bias, as press headlines indicating that the UK government is preparing a strategy to handle a new referendum on Scottish independence. A spokesman of PM May said that there was no need for a new Scottish referendum. EUR/GBP initially gained some further ground on the broader rebound of EUR/USD, but the rally stalled later in US dealings. EUR/GBP closed the session at 0.8509. Cable basically hovered sideways in the 1.24 big figure to close the session at 1.2442.
Overnight, the Lloyds business Barometer remained strong at 40, but was as usual ignored. No further eco data today. End of month repositioning might be slightly supportive for EUR/GBP. The EUR/USD trend will remain important. In the House of lords a detailed review of the Article 50 bill continues. Markets will keep an eye on any headwinds for the PM May's Brexit strategy, but we assume that the impact on sterling will be limited. Earlier last week, the (temporary) acceleration of the euro sell-off pushed EUR/GBP to the 0.84 area. However, a sustained break lower didn't occur. As is the case for EUR/USD (and for several other markets), 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. A sustained break below 0.8450 opens the way for a return to the 0.8304 correction low. We maintain a neutral bias on sterling short-term.
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