EUR/USD correction to slow?

KBC Market Research Desk KBC Bank

The dollar initially showed no clear trend on Friday. US and European equities profited both from headlines on progress in the China-US trade talks. Later, US yields rose more than German/EMU ones and this finally triggered some USD outperformance. US December production data were strong, but U. of Michigan consumer sentiment declined much sharper than expected. However, it didn’t break the USD’s momentum. The trade-weighted dollar jumped to the 96.35 area. EUR/USD eased from 1.14+ levels to close the day 1.1363. USD/JPY had a good run and finished at 109.78. This morning, the China Q4 GDP showed a further slowdown, but the report was largely as expected (6.6% growth YTD Y/Y; 6.4% Y/Y in Q4). Regional equity markets mostly show modest gains. US equity futures are losing slightly ground. The dollar is holding most of Friday’s gain. EUR/USD is trading in the 1.1375/80 area. USD/JPY hovers in the mid 109 area. There are no important data in EMU today. USD markets are closed in observance of Martin Luther King Day. Technical factors and global market sentiment will have to guide USD trading. Last week, there was no straight forward narrative for USD trading. The USD correction on a softer Fed-approach from early this year had run its course. Global sentiment on risk remain constructive, but it had no further negative impact on the dollar as US yields rebounded in lockstep. Medicore EMU data also hampered any euro progress. At the end of the week, the dollar even outperformed. EUR/USD settled again in the established 1.12/1.15 trading range. We start the week with a neutral bias on EUR/USD. The attempt of a topside break is rejected. Later this week, EMU confidence data (ZEW, ifo PMI) might bottom. The ECB will probably also maintain a rather constructive tone on the EMU economy. US politics (shutdown) and the earnings season are wild cards. Last week, the dollar outperformed, but the EUR/USD decline might slow as technical support is lining up from 1.1309 to 1.1270 area.

Sterling fell prey to profit taking on Friday. Earlier last week, the UK currency captured a better momentum as investors saw a rising chance that a no deal Brexit could be avoided. Today, UK PM will set out her plans after the Brexit deal was rejected last week. For now, it looks that a breakthrough in the UK Parliament will be difficult to reach. The EU is said to be divided on the length of a Brexit delay. In this context, further GBP-gains don’t look evident.

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KBC Market Research Desk

KBC Bank

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