The dollar entered calmer waters yesterday as China indicated that news on the country reducing US Treasury holdings was false. However, calm was disturbed by the December ECB Minutes. The ECB discussed a change in communication. Forward guidance will focus more on interest rates rather than on the APP. The Minutes propelled EMU yields and the euro. EUR/USD jumped north of 1.20. The US PPI printed softer than expected and gave no reason for the dollar to counterbalance the rise of the euro. EUR/USD finished the day at 1.2032. USD/JPY lost modestly further ground and closed at 111.26, despite strong US equities.
Overnight, Asian equities mostly trade in positive territory. Japan underperforms as the strong yen weighs. EUR/USD holds in the mid 1.20 area. There are only second tier EMU data today, but markets will still contemplate the consequences from yesterday’s ECB Minutes. US data contain the December CPI and retails sales. Retail sales are expected solid (0.5% M/M headline; 0.4% control group). Headline CPI is expected subdued (0.1% M/M and 2.1% Y/Y, core 1.7% Y/Y).
The dollar was resilient yesterday as the Chinese news was dismissed. Euro strength finally prevailed after the ECB minutes. US price data were not really strong of late. Retail sales are expected solid. So, an outright beat for US data is not that evident. Another miss in the US data contains the risk for further USD losses short term. EUR/USD might revisit the 1.2092 top. This level proved solid off late. We don’t preposition for a break yet, but the pressure grows. Partial stop-loss protection against a break beyond 1.21 might be considered. We look out whether the USD/JPY decline might slow after this week’s setback. If so, it could be a first sign that pressure on the USD might ease.
There were no important UK data yesterday. Underlying sterling sentiment was sluggish as the bickering on Brexit, including on the role of the UK financial sector, continued. In the afternoon, EUR/GBP jump above 0.89 on the ECB minutes. The pair closed the day at 0.8888. There are again no UK data today. Political noise and the broader EUR & USD price moves will guide sterling trading. Euro strength and Brexit uncertainty will probably keep the downside in EUR/GBP well protected. We keep a EUR/GBP buy-on-dips in case of return action to 0.87 big figure. A break beyond 0.8925 would indicated a further improvement in the ST EUR/GBP momentum.
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.