EURUSD is pushing for a break of key 1.1735 level
Dollar tumbles even as Fed leaves guidance unchanged
Yesterday, USD trading initially developed in wait-and-see modus ahead of the Fed policy statement. The Fed took notice that inflation dropped below 2%, but maintained its guidance on future policy and expects inflation to return to 2% in the medium term. The Fed also indicated that the normalisation of its balance sheet can start relatively soon. The changes in the Fed statement were very limited. Even so, the reaction of the dollar was violent. US yields reversed most of Tuesday's rise and the dollar was sold aggressively. EUR/USD closed the session at 1.1734, near at the key 38% LT retracement level. USD/JPY lost a full big figure and finished the day at 111.18.
Overnight, the dollar remains under pressure, but the pace of decline is less aggressive than after yesterday's Fed statement. EUR/USD trades north of the key 1.1714/35 resistance. USD/JPY slipped below 111. AUD/USD jumped above the psychological barrier of 0.80 (currently at 0.8055). Asian equities perform rather well despite the decline of the dollar
.Today, US the durable orders, the jobless claims and the trade balance will be published. Durable goods orders are expected to have sharply rebounded (3.5% M/M) in June following a 0.8% M/M decline in May. The sharp monthly rise is a transportation (Boeing) issue. Excluding the volatile transportation sector, orders are expected up 0.4% after a 0.3% M/M increase in June. Orders are difficult to forecast, but should core orders rise as expected or slightly more, it would suggest a re-acceleration of investment. Initial claims fell last week to a low 233K. Some increase is expected this week (240K). Finally, the trade deficit (goods) is expected to have narrowed slightly in June ($65.5B). The orders data might have some intraday impact on the dollar. Given current negative USD sentiment, the data probably have to be very strong to give the dollar some support. Yesterday's price action tells more about the dollar than about the Fed's assessment. The Fed only took notice of the fact that inflation has dropped below 2%. The paragraph with its assessment/guidance was completely left intact. We don't expect US yields to decline much further. However, in the current context, this might not be enough to stop the USD decline. We don't think that the current sharp USD decline is ‘justified' by the fundamentals/Fed intentions. Nevertheless, the dollar was and remains a falling knife and there is no reason to try to catch it. The US currency desperately needs high profile good news and that isn't available. This good news clearly doesn't come from US politics. The debate on Obamacare fell again in a stalemate. Regarding the data, decent activity data are probably not enough to save the dollar. Prices also need to go up. In this respect, the PCE deflator in tomorrow's US GDP report will be at least as important as the headline growth figure.
EUR/USD is pushing for a break of key 1.1735 level
Over the previous two months, EUR/USD cleared several intermediate resistance levels. The pair is currently pushing for a break of the 1.1714/36 resistance. A sustained break would end the long consolidation that followed the sharp decline of EUR/USD in 2014/early 2015 and change the broader picture for the dollar. EUR/USD is clearly moving into overbought territory (RSI near 75), but this is no guaranty that the move will stop right here. The break still needs to be confirmed, but if the pair doesn't return below 1.16 soon, the way to 1.20 is open. This is not our favourite scenario from an fundamental point of view, but momentum indicators indicate that the dollar remains in trouble. We wait for a technical sign before adding USD long exposure.
EUR/GBP little changed despite EUR/USD rally
Yesterday's weak UK Q2 GDP growth printed exactly as expected. It was one of the last important data series before next week's BoE policy decision. Sterling hardly reacted on the GDP report. In technical trade, the pair drifted to the low 0.89 area, but rebounded after the Fed decision (EUR/USD driven) and closed the session little changed at 0.8943. Cable was propelled by the decline of the dollar and closed the session at 1.3122;
Today, CBI retail data will be published. A modest easing is expected. Markets will look out whether sales get more headwinds from the pressure on disposable income (due to higher inflation).
In a short-term perspective, sterling entered a consolidation pattern (against the euro). The market largely priced out the chances of an August rate hike. In this respect, the bad interest rate news should be discounted. Brexit is also temporary off the radar. Over the previous days, EUR/GBP didn't rise much further despite the overall EUR/USD rally. This suggest some relative sterling strength short-term.
From a technical point of view, EUR/GBP broke above the 0.8854/66 resistance (2017 top) to set a new correction high north of 0.89, but the rally slowed at the end of last week. A break below 0.8720 would suggest that upside momentum is easing. For now, we don't see a trigger for a sustained rebound of sterling against the euro. We still look to buy EUR/GBP on more pronounced dips. For that to happen, EUR/GBP probably needs some help from a correction in EUR/USD.
Author
KBC Market Research Desk
KBC Bank
