EUR/GBP rally running into resistance

KBC Market Research Desk KBC Bank

USD finally gets (modest) interest rate support

On Tuesday, the trends of the previous days initially persisted. USD/JPY (111.10) struggled to avoid further losses even as sentiment on risk remained constructive. The euro remained well bid supported by very strong EMU data. Finally, the dollar received interest support later in the session, lifting the USD currency off the recent lows. EUR/USD dropped below 1.12 to close session at 1.1183. USD/JPY rebounded higher in the 111 big figure to finish the day at 111.78 (from 111.30).

Overnight, Asian equities show a mixed picture. Japanese equities are supported by a weaker yen. USD/JPY trades currently at 111.85. Chinese markets underperform after Moody's cut the China debt rating to A1 from Aa3, stable outlook. The China rating downgrade also put additional pressure on the Aussie dollar. AUD/USD trades currently in the 0.7450 area (top around 0.7517 yesterday). EUR/USD is holding a tight range in the 1.1180 area.

Today, in the US the Existing Home sales (April) will be published. A slight decline at a high level is expected. This evening, the focus will turn to the minutes of the May FOMC meeting. For an in dept analysis see the fixed income part. We expect the report the confirm the Fed's intention to raise rates in June. If the Fed would give concrete hints on the roadmap for its balance sheet reduction, it would be hawkish and USD supportive.
Over the previous days, the dollar hardly profited from the post-Turmp rebound of equities. Euro strength prevailed. Yesterday afternoon, fortunes finally changed in favour of the dollar. Recently, but not yesterday, interest rate differentials drifted gradually against the dollar. If the Fed minutes confirm the Fed's intention to normalize policy further, interest rate differentials between the US and Europe shouldn't go against the dollar anymore. The global equity performance is also a wildcard for USD trading. Yesterday, the dollar finally profited from a better equity sentiment. A risk-off correction, if it would occur, might be mixed for the dollar. However, we are not convinced on the safe haven characteristics of the euro. Over the previous days we suggested that the EUR/USD rebound has gone far. Yesterday's price action suggests that the upside has indeed become tougher. We look to cautiously sell EUR/USD on upticks.

Technical picture.

The USD/JPY rebound ran into resistance two weeks ago. Wednesday's sell-off/re-break below the 112.20 previous top aborted the uptrend and made the short-term picture negative. Return action lower in the 108.13/114.37 range is possible. Yesterday, the USD/JPY decline took a breather, but the global picture didn't change fundamentally.

Earlier this month, it looked that EUR/USD could revisit the 1.0821/1.0778 support (gap). However, poor US data and political upheaval finally propelled EUR/USD north the 1.1023 range top. The correction tops at 1.1300/1.1366 is the next resistance. We think that USD sentiment will have to be extremely negative to clear this hurdle short-term. Further ST EUR/USD gains will become tougher. A return below 1.1023 would indicate that the upside momentum has eased.

EUR/GBP rally running into resistance

Yesterday, the news flow on the UK remained sterling negative. The terrorist attack in Manchester weighed on sterling early in the session. The CBI May reported sales were also softer than expected. EUR/GBP touched a new correction top in the 0.8675 area around noon, but this move was also driven by euro strength. Later, EUR/USD fell prey to profit taking as the dollar rebounded. EUR/GBP closed the session at 0.8628. The decline in cable was more modest. The pair closed the session at 1.2961.

Today, the UK eco calendar is empty. So sterling trading will be driven by to global moves in the dollar and the euro. If the EUR/USD rally takes a breather, the topside of EUR/GBP will probably also be capped. So, some profit taking on EUR/GBP shorts might be on the cards.

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KBC Market Research Desk

KBC Bank

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