EUR/USD decline slows, USD/JPY outperforms

Next KBC Sunrise will be published on Tuesday the 22nd of May 2018.

Yesterday, the EUR/USD decline slowed. Uncertainty on the program of a nascent Italian government weighed temporarily on the euro intraday, but wasn’t able to push EUR/USD to a new 2018 low. The pair settled in the 1.18 area. Investors are looking for details on the government program first. US yields continued trending higher supported by strong US eco data (Philly Fed).
However Europe copied this yield rise, providing no additional interest rate support for the dollar against the euro. USD/JPY outperformed (close at 110.77 from 110.40). EUR/USD finished the day only marginally lower at 1.1795 (from 1.1808).

Overnight, sentiment on risk isn’t too bad. Positive developments in the trade talks between the US and China might be a (slightly) positive factor for global investor sentiment. Investors apparently also feel more at ease with higher US yields as they mirror the expectation for good US growth in Q2. The trade-weighted dollar is near recent top (93.50). USD/JPY still outperforms most other USD cross rates. The pair already touched the next big figure (111). EUR/USD stabilizes in the 1.18 area.

Today, there are hardly any data in the US and Europe. Fed governors Mester, Kaplan and Brainard speak, but it is unsure they will address any specifics on the current monetary policy. So, FX traders will have to look for guidance from global risk sentiment and from the developments on bonds markets. The negotiations to form a new Italian government remains a wild card. The MT picture remains USD constructive. However, on Wednesday and yesterday, the USD rise against the euro lost momentum. US eco data might support USD gains further down the road. However, in a daily perspective some EUR/USD consolidation or even some slight profit taking on EUR/USD shorts might be on the cards. At the same time, the rise in US and EMU yields weighs on the yen as investors expect further policy divergence. The USD/JPY uptrend looks solid. Even EUR/JPY is developing a cautious bottom out pattern.

Yesterday, there was plenty of debate whether the UK will should stay in the EU customs union beyond the transition period. Initially, sterling gained slightly ground on positive headlines. However, sterling returned these gains later as UK PM failed to bring clarity on the issue as she attended the EU summit in Sofia. Today, there also no UK data. We expect technical sideways trading for EUR/GBP in the mid 0.87 area.

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