Sterling propelled as PM calls early elections
|Decline US yields continues to weigh on dollar
On Tuesday, global equity softness was again more negative for the dollar than for the euro. The US eco data were mixed with no impact on USD trading. Later in the session, the dollar came under further pressure as the decline in core/US bond yields accelerated. USD/JPY failed to sustain north of 109 and closed the session at 108.43, but Monday's correction low (108.13) was left intact. The dollar also lost ground against the euro. EUR/USD rebounded north of 1.07 and closed the session at 1.0730. Are investors reducing euro shorts ahead of the French presidential election?
Overnight, most Asian equities are trading with modest losses. The yen remains strong with USD/JPY holding in the mid 108 area. The Japanese 10‐yield remains around 0.0%, away from the 0.1% BOJ target, but that is no negative for the yen. EUR/USD maintains yesterday's gains, holding in the 1.0720/25 area. So, by default dollar softness remains the name of the game. The Aussie dollar is ceding further ground against a declining USD. Overall negative sentiment on risk, a further decline in the Iron ore price and a soft performance of Chinese equities all weigh on the Aussie dollar. AUD/USD is trading in the 0.7525 area.
Today, the market calendar remains thin. There are no important eco data in the US. In the euro area, the final March CPI and the February trade balance are no market movers. Or is there risk for an upward revision for the CPI?. Earnings reports include Morgan Stanley and Blackrock. Wild cards are the appearances of ECB Coeuré, Praet and Boston Fed Rosengren. The former two are well behind Draghi's policy. Rosengren favoured 4 rate hikes in 2007. We will closely listen whether he backtracks on that rather aggressive stance. The Fed's Beige book is a bit more interesting than usual as the divide between the survey data and the hard data has rarely been wider.
Yesterday, by default dollar softness still dominated FX trading. The move was reinforced by a further decline in US bond yields. Contrary to what was the case of late, USD weakness was mainly visible in USD/EUR and less in USD/JPY. We look out whether this pattern continues. We don't see much room for a sustained EUR/USD rebound. Even so, dollar softness combined with some profit taking on euro shorts a head of the French elections might cause a (temporary ?) bid for the euro. 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 U‐turn. So, it is still too early to position for a rebound of the dollar.
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 did meet 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 propelled as PM calls early elections
Yesterday sterling briefly fell‐off a cliff on headlines that UK PM May would make a statement. Rumours on early elections were confirmed as the UK PM called a vote for June 8. Initial sterling weakness was reversed and the UK currency started an impressive rebound. The UK government is largely expected to get a much bigger majority. Markets consider it as a sources of stability. It might give room of manoeuvre in the Brexit negotiations. The jury is still out whether the new political context will really lead to a more balanced Brexit outcome. Anyway, it was used to further reduce sterling shorts. EUR/GBP tumbled more than one big figure (even as the euro traded fairly strong). The pair closed the session at 0.8356. The gain in cable was even more spectacular. The pair closed the session at 1.2824 area, a level not seen since October last year.
Today, there are again no eco data in the UK. PM May will formally ask the House of Commons to support her call for early elections on June 8. The call is expected to get the green light as opposition parties support the call. The day‐to‐day momentum of sterling is obviously strong. In a longer term perspective, the sterling rally is probably a bit overdone. However, at this stage there is no reason to row against the strong sterling tide.
We had a neutral short‐term bias on EUR/GBP. Yesterday sterling dropped below the bottom of the EUR/GBP 0.88/0.84 range. The pair came with reach of the 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, Brexitcomplications remain a potential negative for sterling. However, this is not the focus of sterling trading at this stage.
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