Dollar in correction modus ahead of the payrolls
On Thursday, the USD correction that started earlier this week continued. The US eco data were mixed with a weaker than expected ADP labour report and a strong US non-manufacturing ISM. The dollar lost further ground after the ADP, but we doubt it was the real driver for the USD decline. A further decline of USD bond yields was probably a better reason to unwind USD longs ahead of the payrolls. At the same time, the European yield curve bear flattened, reducing the USD-EUR interest rate differential and supporting the euro. EUR/USD closed the session at 1.0607 (from 1.0489). USD/JPY finished the day at 115.35 (from 117.25).
Overnight, Asian equities show a mixed picture. China and Japan trade with modest losses Japanese equity losses remain modest given the steep decline of USD/JPY. The pair dropped to the low 115 area early in Asia, but trades currently again in the high 116 area. The yuan returns part of the sharp gains of the previous two sessions. The overall USD correction pushed EUR/USD north of 1.06 yesterday in the US and this morning in Asia. For now the dollar decline has petered out. EUR/USD is changing hands in the 1.0585 area.
Today, the focus for currency trading is on the US payrolls. The consensus expects 175K net job growth in December, little changed from November. The unemployment rate is expected to tick up from 4.6% to 4.7%. Average hourly earnings should rebound in December to 0.3% M/M and 2.8% Y/Y. We put the risks on the upside for the headline figure, mainly due to the solid US data that were published recently. However, also some statistical-technical reasons might influence the outcome (see fixed income part of this report). Such a scenario should block the recent decline in US bond yields and help to put a floor for the dollar. The payrolls will probably be the dominant factor for (currency) trading today. Even so, we keep a close eye on the (European) yields markets after yesterday’s remarkable moves (rise in short-term yields, sell-off in LT peripheral bonds). If the market becomes less certain on the ECB’s commitment regarding APP, this could change the picture for EUR/USD. For now this is nothing more than an hypothesis, but we keep an eye on the issue.
Global context: EUR/USD touched a new multi-year low at 1.0341 on Tuesday, but no sustained break occurred. This was the sign for USD profit taking. After the Trump rally, there is already a lot of good USD news discounted. Interest rate differentials between the dollar and the euro remain very high, but didn’t widen anymore of late, slowing the rise of the dollar.The big absolute interest rate support should provide a solid USD bottom as long as US data remain good and as long as there are no profound doubts on the ability of the Trump-administration to execute a pro-growth agenda. So, we look to buy the dollar on dips on signs that this week’s correction has run its course. EUR/USD 1.0653/70 is a first resistance. It is preferred that this level should hold after the payrolls. A return north of 1.0874 would question the USD positive momentum. On the downside, EUR/USD 1.0341 is still the first reference. A test of parity remains possible MT. USD/JPY also faced a substantially setback over the previous three days. The LT trend remains up, but the break below a first minor support of 116.05 suggests that short-term positive momentum is waning. As is the case for USD/EUR, we first want signs that the USD correction finds support, before adding USD longs.
Cable jumps sharply higher on USD weakness
On Thursday, the correction of the dollar also affected the major sterling cross rates. Both cable and EUR/GBP traded strong early in the session on global dollar weakness., but rally eased soon. The UK services PMI was again very strong (56.2 vs 54.7 expected). Sterling gained a few ticks after the publication, but the gyrations in the dollar remained the main driver for sterling trading.
Later in the session, both cable and EUR/USD rose in a similar way as the dollar came again under pressure. So, EUR/GBP this time didn’t really profit any more. EUR/GBP closed the session at 0.8541 (from 0.8512). Cable jumped sharply higher to close the session at 1.2419 (from 1.2323).
Today, only the UK Q3 labour cost data will be published. The report is no market mover. So, the swings in the dollar will set the tone for sterling trading.
Sterling held strong in November and December, but lost some momentum in the second half of last month. EUR/GBP is holding a sideways trading pattern in the 0.85 area. For now, we see no trigger for a clear directional move.
Uncertainty on the next steps in the Brexit debate make sustained sterling gains difficult in the run-up to the end of March article 50 deadline. We slightly prefer a buy-on-dips strategy in case of return action toward the 0.8300 ST range bottom.
Author
KBC Market Research Desk
KBC Bank
