Dollar looking for new trading theme

KBC Market Research Desk KBC Bank

The dollar lost modest ground yesterday as investors took a guarded approach awaiting the signing of the phase one US-China trade deal. Equities hovered near recent top levels, but core bond yields eased. The latter often is a negative for the dollar. US eco data were mixed with limited impact on trading. The trade-weighted dollar declined during most of the session, closing at 97.23. EUR/USD slightly outperformed (close at 1.1150). The setback in USD/JPY was modest (close at 109.90).

Overnight, Asian equites are trading mixed. WS yesterday challenged the all-time record levels but gains were modest. The US-China trade truce should be discounted and (FX) markets are looking for a new theme. Moves in bonds and in the major FX cross rate modest this morning. The yuan is holding relatively strong (USD/CNY 6.89). USD/JPY is trading close to, mostly marginally below the 110 barrier. EUR/USD maintains yesterday’s’ gains, hovering near the 1.1150 level.

Later today, the US, the eco calendar is busy with the import prices, the Philly Fed business outlook, retail sales, the NAHB housing index and jobless claims. Retail sales take centre stage. December sales are expected solid (0.4% M/M control group). Meeting expectations should be possible after a mediocre November report. Even so, we assume that the dollar is slightly more sensitive to a negative rather than a positive surprise. A stabilisation/limited decline in core yields tends to weigh on the dollar more than on the likes of the euro. Global equity sentiment currently also doesn’t provide clear guidance for USD trading.
From a technical point of view, EUR/USD last week dropped temporarily below 1.11, but 1.1066 support survived on soft payrolls. EUR/USD 1.1066 remains our first downside reference. A rebound above 1.1180 would call off the ST downside alert. Still, a ST break beyond 1.1250 looks far from easy.

Sterling temporarily suffered from much softer than expected UK CPI data yesterday. UK yields nosedived and markets currently discount a more than equal chance (about 65%) of a Jan 30 BoE rate cut. Even so, the damage for sterling could have been much bigger. EUR/GBP closed the session only marginally higher at 0.8551. There are few data in the UK today. Even after yesterday’s sterling resilience we see little sterling upside ST as the rate cut debate develops further.

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KBC Market Research Desk

KBC Bank

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