Sterling holding strong, but no further gains
|Dollar in wait-and-see modus. No rebound yet
On Wednesday, there were only second tier eco data releases. Core bond yields rebounded after the recent decline and put a floor under EUR/JPY and USD/JPY. The broader picture for the dollar remained indecisive. The trade‐weighted dollar held within reach of the recent correction low, while EUR/USD hovered in the 1.0725 area, near this week's high. So, there was no consistent indication across markets that the US reflation trade would resume and that a sustained dollar rebound is around the corner.
Overnight, Asian equities opened soft after a disappointing performance in the US, but found a better bid as the session proceeded. Japanese March foreign trade data were stronger than expected and suggest a decent global economic context supports regional sentiment. However, the equity rebound has hardly any impact on the dollar. USD/JPY hovers little changed near the 109 level. EUR/USD also maintains its tight range in the low 1.07 area. Commodity currencies remain in the defensive after yesterday's sharp decline of the oil price. AUD/USD is trading in the 0.75 area. USD/CAD jumped to the high 1.34 area.
Today, market attention will go to the EMU consumer sentiment, the Philly Fed business outlook and the US initial claims. The latest NFIB small business confidence and the Michigan consumer sentiment held close to record highs, but the NY business sentiment plunged in April, suggesting that firms might have second thoughts about Trump's ability to deliver on tax cuts and infrastructure spending. The Philly Fed business sentiment fell already in March, but is still at very high level. For April a slowing to 25.5 is expected. A sharper decline wouldn't go unnoticed. EMU consumer confidence is expected marginally stronger at ‐4.8 (from ‐5), a high level for this indicator.
Of late, by default dollar softness dominated FX trading. The move was reinforced by a sustained decline in US yields. Initially, USD softness was mainly visible in USD/JPY, but of late EUR/USD also rebounded north of 1.07. part of this move, however, might have been a euro rebound/short squeeze rather than USD weakness. We look out whether this week's tentative US bottoming out process is confirmed. For the overall USD performance we continue to keep a close eye on the US bond markets. We maintain the view that the correction on the US bond markets has gone far enough. However for now there is no trigger for Uturn. So, it is still too early to position for a rebound of the dollar. In a day‐to‐day perspective, there is maybe even room for some further unwinding of euro shorts ahead of the French election.
From a technical point of view, USD/JPY broke through the 110 key support, after having failed to regain the 111.36/60 previous range bottom. We downgraded our USD/JPY assessment to bearish, as long as the pair doesn't regain 112.20 (neckline ST double bottom). Next key support (62% retracement) comes in at 107.18.
EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March, but the test was rejected. EUR/USD returned lower in the 1.0875/1.05. The move met support in the 1.06 area, as the dollar traded weakish of late. The picture is turning more neutral as the pair returns to the middle of the ST range. We slightly prefer to sell EUR/USD on upticks in case of a return higher in the range as we see room for a broader USD comeback.
Sterling holding strong, but no further gains
Yesterday, sterling maintained most of Tuesday's impressive gains after UK PM May called for an early election on June 8. It is another reason for LT sterling shorts to reduce positions. However, there was only a very modest correction on Tuesday's GBP rally. EUR/GBP closed the session at 0.8383 (from 0.8356). Cable finished the day at 1.2777 (from 1.2841).
Today, there are again no UK eco data. BoE governor Carney speaks in Washington, but we don't expect him to make bold statements on high profile policy issues (or regarding the eco outlook). We assume that the BOE will keep a low profile as the election campaign has started. We don't row against the sterling positive tide. In a longer term perspective, the sterling rally is probably overdone.
We had a neutral short‐term bias on EUR/GBP. On Tuesday, sterling dropped below the bottom of the EUR/GBP 0.84 support, improving the picture for sterling. The pair came with reach of the key 0.8305 support (Dec low). We look whether this level holds. A break below would be highly significant from a technical point of view. Longer term, Brexit‐complications remain a potential negative for sterling. However, this is not the focus of sterling trading at this stage.
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