The focus for FX/USD trading turned to the US on Wednesday. At first, euro weakness/USD strength still reigned. German/EMU growth data were again week and EUR/USD (re)tested the 1.1250 area. However, fortunes for the dollar changed as December US retail sales printed at an awful -1.2% M/M. US yields and the dollar fell off a cliff. In a market looking for clear direction, EUR/USD finally finished at 1.1295 (from 1.1261). USD/JPY closed at 110.48 (from 111.0).
Overnight, Asian markets are pondering the meaning of the poor US retail sales. The headlines on the US-China trade talks are now seen as indicating that the glass is half empty rather than half full (parties say they are still quite far apart). At the same time, Chinese price data remain soft and the US budget solution isn't that comforting. Asian equities show broad-based losses up to 2.0% (Hong Kong). The (trade-weighted) dollar is trading off yesterday's top, but the loss remains modest (97.05 area). USD/JPY (110.35 area) extends yesterday's postretail sales decline. EUR/USD hovers slightly below the 1.13 handle.
Today, the US Empire manufacturing survey, US production data and consumer confidence of the U. of Michigan will be released. The Empire manufacturing and Michigan confidence are expected to improve after a substantial decline last month. In a broader perspective, markets will become more alert for US data after yesterday's shocking retail sales. Unconvincing data will probably affect risk sentiment first. The impact on the dollar is less obvious. USD/JPY is vulnerable in case of more negative news. We doubt that EUR/USD will be able to start a sustained rebound if global risk sentiment remains ‘instable', even if it is (partially) due to US data. The advice of the Commerce department on auto import tariffs (expected this weekend) is an additional source of uncertainty for Europe and the euro. This week, the dollar rally showed signs of hesitation, but the picture especially for EUR/USD hasn't materially improved yet. Even with softer US data, a real euro rebound probably needs some of the global/EMU event risks to be solved and better EMU data. This condition isn't met. EUR/USD 1.1216 marks the Nov low. EUR/USD 1.1287 is 61% retracement 2016 low/2018 top).
Sterling (EUR/GBP above 0.88) traded in the defensive from most of the day as investors looked out of a new Brexit vote in the UK Parliament yesterday. May lost the (non-binding) vote, undermining her mandate to renegotiate the Brexit deal. So, more political muddling through will probably continue. We stay cautious on sterling as long as there are no indications on an delay/rising chance for an orderly Brexit.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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