Dollar rally blocked by poor US ISM

KBC Market Research Desk KBC Bank

‘By default USD strength' initially prevailed yesterday. Persistent uncertainty on the US-China trade conflict and the Brexit crisis coming to a culmination point pushed UK and EMU yields to new lows. EUR/USD dropped further in the 1.09 big figure. The US manufacturing ISM changed fortunes for the dollar. The headline figure dropped below the 50 boom-or-bust level.Details also showed that the trade war is hurting US production. US yields and the dollar declined. EUR/USD finished at 1.0974 (from 1.0970). USD/JPY closed below the 106 handle.

Asian equities are trading mixed to slightly higher, despite a poor performance in the US yesterday. The China Caixin services PMI printed better than expected. The yuan regains some ground (USD/CNY 7.1650 area). EUR/USD stabilizes in the 1.0975 area. Australian Q2 GDP printed as expected (0.4% Q/Q). The report eased fears of a sharper slowdown. The Aussie dollar extends yesterday's rebound (AUD/USD 0.6775).

The final EMU PMI's and the US trade balance will be published today. Several Fed policy makers are scheduled to speak. We don't expect them to overthrow expectations for a 25 bp September rate cut. Brexit remains a source of volatility for the euro.

The USD rally was blocked yesterday after a poor US ISM. EUR/USD rebounded, but is still holding below 1.1027 previous support. US yields recently declined more on bad news than German/EMU ones. We look out whether this continues and whether it slows the USD's rise. That said, the technical EUR/USD picture stays fragile and a real euro comeback is not eviden before next week's ECB decision. EUR/USD 1.0821/1.0778 (gap April 2017) remains next technical support.

Sterling and UK yields nosedived yesterday morning as the Brexit crisis reached a culmination point with a first key vote to block Johnson's no-deal Brexit approach. However, sterling already reversed most of the intraday loss before the vote. Parliament is likely to formally block a no-deal Brexit today. Will this result in fresh elections? For sterling, we yesterday took the approach that quite some bad news is already discounted. For further sterling losses, we probably need a scenario in which the UK is heading to a chaotic Brexit. As long as this isn't ‘sure', we stay cautious to engage in ‘last minute' sterling shorts.

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KBC Market Research Desk

KBC Bank

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