Risk-off to block any post Fed-USD comeback
|Risk-off to block any post Fed-USD comeback
Yesterday, the dollar failed to build on Wednesday's post-Fed gains. This was a disappointment for USD bulls. Investors clearly didn't buy into the Fed's "hawkish" stance on policy normalisation. The US yield rally also fell apart. Strong US eco data didn't support further USD gains. EUR/USD finished the day at 1.1941 (from 1.1892). USD/JPY was more resilient. The pair hovered in a tight range close to the recent top and at 112.48.
Overnight, risk sentiment soured in Asia. Press reports said that North Korea might retaliate on Trump's speech and trade measures, testing a hydrogen bomb in the pacific (see headlines). The renewed geopolitical tensions caused a modest risk-off repositioning. Asian equity indices show losses, bonds gain and the Yen outperforms. USD/JPY declined from the mid 112 area to the 111.84 area. The dollar is also losing slightly against the euro (EUR/USD currently at 1.1960). Even post-Fed, the dollar remains most vulnerable to a decline in core yields.
Today, the US & EMU September PMI's will be published. Both are expected to show only minor changes compared to August. US manufacturing PMI is expected slightly higher (53). The weaker dollar hadn't yet a substantial impact. The US nonmanufacturing PMI confidence has gone steadily up in the past months and consolidation is expected (55.7). The EMU manufacturing PMI reached a cyclical high in August at 57.4 despite a stronger euro. Consensus expect a minor decline to 57.2. The EMU Services PMI is expected marginal higher at 54.8 (from 54.7). We see risks on the upside of consensus for the latest measure. After the Fed meeting, any USD reaction to good US data would be interesting, but the US PMI is no strong market mover. There are also plenty of ECB members scheduled to speak, including Draghi, Coueré and Constancio. The discussions on the fate of the APP programme in 2018 are ongoing. However, tensions on North Korea probably will dominate trading. Of late, the risk-off reaction to geopolitical tensions was mostly modest and short-lived. However, investors will probably refrain from picking-up risky assets ahead of the weekend. This lingering risk-off feeling is mostly negative for the dollar; in the first place for USD/JPY, but to a lesser extend also for EUR/USD.
From a technical point of view EUR/USD hovers in a consolidation pattern between 1.1823 and 1.2070. It was disappointing for EUR/USD bears that last week's correction didn't reach the range bottom. More confirmation is needed that the bottoming out process in US yields and in the dollar might be the start of more sustained USD gains (against the euro). In case of a break, next support in EUR/USD comes in at 1.1774 and 1.1662
The day-to-day momentum in USD/JPY is (was?) more constructive. The yen traded weak across the board and the dollar might be in better shape post-Fed. USD/JPY regained the 110.67/95 previous resistance. This a short-term positive. If current event risk on north Korea is again temporary in nature, the yen might remain in the defensive. The 114. 49 correction top is the next important reference.
Sterling well bid going into May's Brexit speech
Yesterday, sterling initially stabilized after Wednesday's strong performance. UK August public finance results were better than expected but played no role. Sterling found again a stronger bid late in Europe. We didn't see any specific reason. A further repositioning ahead of May's Brexit speech was probably in play. EUR/GBP finished the session at 0.8792. Cable closed the day at 1.3580. The recent highs against the euro and the dollar are again within reach
Today, the CBI trends orders will be published. However the focus will be on the Brexit speech of UK PM May. PM May is expected to sound a bit more conciliatory on key issues as the Brexit bill and will aim for a transition period. Question is whether these ‘concessions' will be enough to unlock the stalemate at the next round of formal negotiations. A more constructive environment might be slightly sterling supportive. However, we don't expect today's speech to clear the horizon in a profound way. EUR/GBP is again close to the recent lows. A break could cause some extension of the recent GBP-comeback.
EUR/GBP made an impressive uptrend since April and set a MT top at 0.9307 late August. The euro was strong and UK price data were soft enough to keep the BoE side-lined. Recent UK price data amended this story and the reversal of sterling was reinforced by hawkish BoE comments. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of relative euro strength and sterling softness to persist. However, the prospect of (limited) withdrawal of BOE stimulus put a solid floor for sterling ST term. We look how far the current correction has to go. EUR/GBP is nearing support at 0.8743 and 0.8652, which we consider difficult to break. We start looking to buy EUR/GBP on dips.
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