Dollar nearing key resistance area

KBC Market Research Desk KBC Bank

EUR/USD initially drifted sideways in the mid 1.12 area but the dollar gained traction early in US dealings. The move was mainly technical in nature.
USD/CHF buying supported broader USD gains. A constructive Philly Fed services index, solid US new home sales and US corporate earnings mostly beating analysts' estimates were USD supportive too. EUR/USD tested the 1.12 area even as the US/German interest rate differential narrowed. EUR/USD closed at 1.1227. USD/JPY came again close to the 112 big figure, but still closed at 111.86.

Asian equities mostly show modest losses and fail to join the record race of WS yesterday evening. Australia Q1 CPI unexpectedly dropped to 1.3% Q/Q, raising speculation on an RBA rate cut. Yields nosedived and so does the Aussie dollar. AUD/USD is trading in the 0.7035 area. EUR/USD remains in the defensive (1.1220 area). USD/JPY shows no clear tend (111.85 area) even as sentiment on risk turn less buoyant.

Today, the German Ifo confidence is expected to improve slightly (headline 99.9). Other recent data evidence suggests an upward surprise might be difficult. There are no important eco data in the US, but the earnings season is in full swing. Also keep an eye at the Bank of Canada policy decision.

Ongoing poor EMU data (PMI's) last week pushed EUR/USD back to the low 1.12 area. At the same time, the dollar enjoys some by ‘default bid' as US data outperform most other developed economies. In a ST perspective, some further downward EUR/USD erosion might be on the cards. With the Fed firmly on hold, we don't expect a big leap higher of the dollar. That said, the tradeweighted dollar and EUR/USD are near relevant short-term resistance/support respectively at 97.70 and 1.12/1.1177. A USD break, if so, probably will develop in a gradual way, but for now, the US currency retains the benefit of the doubt. The return of UK politicians after the Easter recess yesterday didn't bring much clarity on Brexit. UK PM May is said to prepare a vote on an alternative Brexit Bill as soon as possible. At the same time, her authority within her own party is ever more questioned. EUR/GBP temporary dropped to the mid 0.85 area but later returned to the 0.8675 area. Today, the public finance data will probably be ignored.

More technical trading in EUR/GBP might be on the cards. EUR/GBP 0.8700/0.8723 is a tough resistance, especially as the euro also shows a sluggish momentum.

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KBC Market Research Desk

KBC Bank

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