Dollar looking for a bottom?

KBC Market Research Desk KBC Bank

The EUR/USD rally was a bit exhausted yesterday after setting a new correction top in Asia. ECB members Constancio and Nowotny warned that a sudden rise of the euro complicates the ECB’s effort to bring inflation back to target. EUR/USD tested the 1.22 mark early in US trading. The 2-yr US/GE yield spread rose to a cycle top of over 2.60 %. EUR/USD closed the session at 1.2186. USD/JPY finished at 111.29.

Asian equities opened strong overnight, but struggle to maintain the early gains. The dollar is holding most of yesterday’s gains on higher US yields. The Japan 10-yr yield nears the 0.10% mark, blocking a further decline of the yen. USD/JPY holds in the low 111 area. The EUR/USD decline also slows. EUR/USD hovers near 1.22. The Aussie dollar fails to profit from strong November/December job growth. An overnight attempt to clear AUD/USD 0.80 failed.

US housing starts and permits are forecast to ease slightly. The Philly Fed business outlook is also expected slightly softer from 27.9 to 25.0. Activity data are not the focus of markets these days. So, any market reaction to these data will probably only be of intraday significance. Yesterday, the dollar finally rebounded. Equities, Fed comments and the Beige book were supportive, but there is no guarantee but there is no guarantee that this is enough to trigger a sustained bigger correction already at this stage. We keep a close eye at an appearance from ECB’s Coeure. Will he also warn on the impact of a too fast rise of the euro?

Global Picture: The dollar was in the defensive of late as markets prepare for a change in policy from central banks outside the US, especially from the ECB. This propelled EUR/USD despite a huge interest rate differential in favour of the dollar. Yesterday, the dollar decline finally showed tentative signs of bottoming, but the jury is still out. A return below previous resistance at 1.2092 is needed to call off the ST alert for the dollar. EUR/USD 1.2598 (62% Retracement) is next important resistance on the charts.

EUR/GBP lost substantial ground yesterday even as there were few UK eco data. The EUR/USD decline was an important factor. This morning, UK RICS house prices were better than expected. There are no other UK data today. The day-to-day momentum of sterling improves, but we hold the view that 0.8760/00 is a strong support area ST.

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KBC Market Research Desk

KBC Bank

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