EUR/USD drifts lower ahead of FOMC

KBC Market Research Desk KBC Bank

EUR/USD extended its gradual decline on Friday. EMU February inflation was revised from 1.2% to 1.1%, confirming recent analysis of ECB's Draghi and Praet that there is still work to do on inflation. At the same time, investors remained a bit cautious on USD shorts going into this week's FOMC meeting. US data including production and Michigan consumer confidence were good. The dollar maintained the benefit of the doubt. EUR/USD closed the session modestly lower at 1.2290. USD/JPY hovered up and down to close the session at 106.01.

Sentiment on Asian markets is fragile to slightly negative this morning. China outperforms. Investors maintain a cautious approach ahead of upcoming event risk including trade frictions between the US and its trading patterns and the FOMC policy decision. The trade-weighted dollar is holding near last week's ST recovery top (currently 90.30 area). EUR/USD is drifting further south (1.2265 area). Comments from some less dovish ECB members this weekend (Knot/Weidmann) didn't change the euro dynamics. The yen slightly outperforms the dollar. USD/JPY trades in the 105.74. Overall market uncertainty rather than Japanese politics are probably to blame.

Today's EMU and US eco calendars are thin. Last week, soft ECB talk was reinforced by poor EMU inflation data. Even with those data, the debate on further ECB policy normalization will have to start further down the road. However, it is too early for the ECB to catch up with the Fed anytime soon. Interest rate differentials between the dollar and the euro widened further. For now, this presumed policy divergence is weighing slightly on EUR/USD. The pair tries to break intermediate support at 1.2273. EUR/USD 1.2155 might again come on the radar. We keep a close eye on USD/JPY & EUR/JPY. EUR/JPY breaking below 129.35 support could weigh further on EUR/USD, too.

UK news flow was mixed on Friday, but sterling remained well bid. EUR/GBP declined further to the low 0.88 area, partially due to euro softness. This week's UK data might be mixed. Markets will keep a close eye at the EU summit looking for any progress on Brexit. The combination of a soft euro and hope on some Brexit progress might pull EUR/GBP a bit lower in the established 0.8950/0.8690.consolidation range.

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KBC Market Research Desk

KBC Bank

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