KBC Market Research Desk
KBC Bank
‘By default' USD buying continues
EMU PMI's were stronger than expected yesterday. Core (German and US) yields and equities rose after the PMI release, but didn't help the euro. France remained a euro negative and the resumption of the reflation trade supported the dollar. The rally slowed later in the session as US bond yields softened. Even so, the US currency still closed the session with decent gains. EUR/USD closed the session at 1.0536 (from the 1.0614) area. USD/JPY finished the day at 113.68 (from 113.10).
Overnight, most Asian equities indices follow the rally from the US yesterday. Japanese equities struggle to avoid loses as USD/JPY lost modest ground. In a speech in Singapore, Fed Mester sounded a bit dovish as she said that the Fed doesn't want to surprise markets on interest rates. The dollar, especially USD/JPY, softened a bit. At the same time, US bond yields maintain a slightly upward bias. So, there is again a slight discrepancy across markets. USD/JPY is trading near 113.50. EUR/USD changes hands in the 1.0525 area. RBA's Lowe warned on the debt load of Australian households. At the margin, the risk of too high debt might make the RBA cautions to cut rates further. AUD/USD rises slightly overnight, currently trading in the 0.7690 area.
Today, the German IFO is expected slightly softer at 109.6 (from 109.8). After strong German PMI's, an upward surprise is possible. In the US, the Minutes of the January FOMC meeting are in focus. They probably won't give us new insight in the timing of the next rate hike. However, since the meeting, economic data have been very strong and inflation surprised on the upside. Yellen was more hawkish at the testimony before Congress as she said "it would be unwise to wait too long before tightening". Several governors pointed to the possibility of a March rate hike. A slightly hawkish tone in the Minutes shouldn't come as a surprise. Over the previous days, French election worries fuelled uncertainty on European markets (French spread widening). It weighed on the euro and supported USD/EUR gains, as the global/US reflation trade continues. Call it by default USD buying/euro selling. USD/JPY underperformed the USD/EUR gains. The political uncertainty in Europe will continue to play its role. At the same time, the focus in the US will turn to Trump's fiscal plan and Fed comments. The combination of both factors suggests further USD buying against a weak euro. We maintain a more cautious bias on USD/JPY. Selling pressure from EUR/JPY might continue to weigh.
Global context. The dollar corrected lower since the start of January as the Trump reflation trade slowed down. Two weeks ago, the dollar bottomed out, supported by Trump's tax promise. Underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and favour a sell EUR/USD on upticks approach. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains a key support. The comments of Yellen before Congress (and of other Fed members) were USD supportive, but had little lasting impact on yields. We keep a cautious USD positive bias, but remain more cautious on the upside potential of USD/JPY compared to USD/EUR.
EUR/GBP sliding below 0.8450 support.
Yesterday, sterling gained ground against an overall weak euro, but stabilized against broadly strong dollar. At a hearing before Parliament, BoE's Carney defended the assessment of the February inflation report. The central bank raised its growth forecast, but kept its inflation forecast unchanged as the BoE said that unemployment could decline further before wages rise. Some BoE governors disputed Carney's assessment. Even so, sterling remained well bid. Especially, EUR/GBP was pressured by the decline of EUR/USD. The pair closed the session at 0.8448, testing the key 0.8450 support. Cable close the session at 1.2474 (from 1.2463).
Overnight, EUR/GBP is extending its test beyond the 0.8450 support. Euro weakness remains the driver. The first stage of the Brexit debate in the House of Lords didn't bring any new roadblocks for PM May. The nest step is scheduled for early next week. The risk-on context is also a ST sterling supportive. Later today, the details of the UK GDP Q4 GDP will be published. A confirmation of the 0.6% Q/Q and 2.2% Y/Y growth is expected. We don't expect a lasting impact on sterling trading. EUR/GBP recently hovered in a tight range north of the 0.8450 support. Sterling sentiment softened slightly as the market feels that a BoE rate hike is still very far away. At the same time, euro softness weighed on EUR/GBP. Longer term, we have a sterling negative view as the Brexit still has to (negatively) impact the UK economy. However, this is no issue at this stage. Euro weakness prevails. A sustained break below the 0.8450 might trigger additional stop-loss selling. The EUR/GBP 0.8304 correction low is the next key support.
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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