USD decline slows
On Thursday, European markets initially stayed in modest in risk-off modus, but the risk-off trade had no additional negative impact on the dollar. Interest rate differentials turned slightly in favour of USD. The US eco data were also better than expected. Later in the session, US equities even recouped a small part of Wednesday's losses, squeezing the dollar higher. EUR/USD closed the session at 1.1103 (from 1.1159). USD/JPY finished the session at 111.49 (from 110.83).
Overnight, Asian equities are trading slightly higher, reversing earlier losses. The immediate stress from the Trump crisis is easing. For now, the fall-out from the Brazil crisis on other Emerging markets looks contained. The cautious risk-rebound is no big help for the dollar. USD/JPY is going nowhere and trades currently in 111.40 area. EUR/USD is holding a tight range in the low 111 area. Markets look for new impetus.
Today, there are no US data and only second tier ones in the EMU. Markets will keep an eye at the speeches from ECB' Praet and Constancio and Fed governors Williams and Bullard. We expect the ECB speakers to take a guarded approach as the internal debate on the communication at the June ECB meeting is still ongoing. The Fed speakers won't question the case for a June rate hike. Remarks on the tapering of the balance sheet remain interesting, but the impact on USD trading will be limited. The dynamics of equities will probably remain the key driver for FX trading.
In an daily perspective, some further consolidation might be on the cards, both for equities and for the dollar. Markets haven't made up their mind on the LT impact of the recent developments.
In a longer term perspective, we maintain the working hypothesis that recent turmoil makes it more difficult for US equities to extend the record rally. Maybe, we entered a sell-on-upticks market. At the same time, a June Fed rate hike is not in question and US yields are near important support levels. So, the dollar shouldn't lose that much interest rate support, even if sentiment on risk turns less buoyant. In this context, we assume that a sustained rebound of USD/JPY has become tough short term. A cautious sell-on-upticks approach is preferred. There is maybe more room for a ST rebound of the dollar against the euro. We remain sceptic on the safe haven characteristics of the euro if sentiment on risk would turn really risk-off.
The USD/JPY rebound ran into resistance last week. Initially, it was no more than a correction, but Wednesday's sell-off/re-break below the 112.20 previous top aborted the uptrend and made the short-term picture negative. Return action lower in the 108.13/114.37 range is possible.
Last week, it looked that EUR/USD could revisit the 1.0821/1.0778 support (gap). However, Friday's US data and political unheaval finally propelled EUR/USD north the 1.1023 range top, improving the technical picture. The correction tops at 1.1300/1.1366 is the next resistance. We think that USD sentiment will have to be extremely negative to clear this hurdle short-term. Further ST EUR/USD gains might become tougher. Yesterday's top at 1.1172 is a first reference. A return below 1.1023 would indicate that the upside momentum has eased.
Cable fails to sustain gains north of 1.30
Yesterday, sterling showed two faces. Initially, sterling rebounded after very strong UK April retail sales. The report eased recent fears that a decline in real income due to higher inflation could weigh on domestic spending. EUR/GBP dropped from the 0.86 area to fill bids around 0.8525. Cable finally cleared the 1.30 barrier and came close to the 1.3050 area. However, sterling couldn't maintain the positive momentum. Especially cable was hit hard by a USD up-tick during the US trading session. We don't see high profile UK news to explain the manifest underperformance of sterling. The pair dropped to the 1.29 area and closed the session at 1.2938. EUR/GBP finished the session at 0.8580.
Today, the CBI trends orders are expected stable at 4. The impact of the report will only be of intraday significance for sterling trading. Sterling might be slightly more sensitive to a weak report rather than to a strong one. Of late, the positive sterling sentiment eased and euro strength prevailed in EUR/GBP trading.. The pair bottomed out with 0.84/0.8330 as a solid bottom. The breach of 0.8509/31 (previous ST tops) improved the technical picture. For now, we stick to the EUR/GBP uptrend even as the euro rebound might slow short-term. Longer term, Brexit remains potentially negative for sterling.