Euro declines, but dollar isn't in good shape either

KBC Market Research Desk KBC Bank

Earlier this week, USD softness prevailed due to US political uncertainty. The USD still wasn't in great shape, but euro softness became more dominant yesterday. EUR/USD declined in the 1.23 big figure. Of late, interest rate differentials were often ignored, but 2-yr German/US spreads reached a new cycle peak. Finally, this provided some downside protection for the dollar against the euro. EUR/USD closed the session at 1.2305. From a technical point of view, the established ranges remain intact. The picture of USD/JPY remained fragile. Despite a late session rebound, the pair still closed the session at 106.34.

Overnight, BOJ governor Kuroda was reapproved for another term of five year. However, the focus in Japan is currently on the land scandal, questioning the political future of PM Abe and even more of Fin Min Aso. For now, the political noise, both in the US and Japan, is weighing on USD/JPY and on Japanese equities. USD/JPY dropped again below the 106 level. The loss of the dollar against the euro stays very modest (EUR/USD near 1.2315).

The final EMU CPI is expected at a low 1.2% Y/Y today. US housing starts building permits, production, and Michigan consumer confidence will also be published. These reports probably won't change investor expectations for next week's Fed meeting. This week, the euro came under modest pressure as a gradual ECB approach questions the timing of a first rate hike in 2019. At the same time, USD political uncertainty remains a factor, too. The EUR/USD decline might ease. A break below the 1.2273 correction low probably won't be that easy. At the same time, rising interest rate differentials make holding USD shorts quite costly. For now, we assume more consolidation in the 1.2155/1.2450 range going into next week's Fed meeting. Downside pressure in USD/JPY and EUR/JPY might also help to cap the topside in EUR/USD, even in case off broader USD weakness.

Technical considerations continued to dominate sterling trading. Cable was blocked ahead of the 1.40 resistance. EUR/GBP drifted south in line with EUR/USD. There are no UK eco data today. Tensions between Russia and the UK have little impact on sterling. Technically inspired trading for EUR/GBP around current levels might be in the cards.

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KBC Market Research Desk

KBC Bank

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