Dollar profits only modestly from global risk-off

KBC Market Research Desk KBC Bank

The US airstrike killing Irian general Soleimani on Friday morning trigged a standard risk-off correction across global markets. The fall-out from this trade also filtered through into FX trading, but the impact was smaller compared to what happened in equities or in the interest rate markets. EUR/JPY, EUR/USD and USD/JPY drifted lower. After the initial decline, the yen preserved its gain with USD/JPY holding near 108. However, the euro gradually found its composure, with EUR/USD and EUR/JPY rebounding. EUR/USD finished the day at 1.1161 (1.1172 on Thursday evening). USD/JPY closed at 108.09 (from 108.57). The gain in the likes of the CHF (EUR/CHF mid-1.08 area) was modest.

During the weekend, US officials tried to justify the killing of Soleimani. However, for now, it didn’t reduce uncertainty. Sentiment remains risk-off in Asia this morning. Most regional indices show losses of 1%-1.5%. The yuan weakened (USD/CNY 6.9775). The Caixin Services PMI disappointed (52.6 from 53.2) but wasn’t the focus of trading. USD/JPY is struggling not the fall below the 108/107.80 area. EURUSD is losing a few ticks (1.1160 area). For now, the euro decline/USD gain was rather modest.

Today, the eco calendar is rather thin with mainly the final EMU services PMI’s. Investors will try to assess the next developments in the US-Iran conflict. The risk of Iranian retaliation most likely will cause investors to keep a defensive bias. We keep a close eye on EUR/JPY. Any euro gains will probably be difficult in an outright risk-off context. That said, we assume that the 1.1125/1.1066 area might be a solid support for EUR/USD. In EUR/JPY we keep an eye at the120 area and 119.25 area.

Sterling started the new year on the back foot. UK eco data indicate that Brexit uncertainty continued to weigh on the economy in December. For now, it isn’t sure to what extent this uncertainty will disappear even as the UK will leave the EU at the end of this month. The EU-UK trade negotiations will continue to cast a shadow on economic activity. Global uncertainty also doesn’t help sterling. Sterling traders are looking for the new trading theme as Brexit enters a new phase. In a ST perspective, we assume that the 0.8450 area to be a first solid support for EUR/GBP.

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KBC Market Research Desk

KBC Bank

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