Has sterling ‘rebound' run its course?
Can USD profit further from higher yields/good data?
Yesterday's trading dynamics were in line with Wednesday's price action. Core bonds yields rose again sharply. Interest rate differentials moved in favour of the euro as the bond sell-off hit Bunds harder than Treasuries. EUR/USD rose modestly early in the session, but the gains evaporated later. The pair closed the session at 1.0897, even marginally lower compared to Wednesday (1.0908). USD/JPY was again outright beneficiary of the rise in core bond yields. The pair broke beyond the recent highs and closed the session north of the 105 barrier (105.29 from 104.47).
Overnight, Asian equities trade mixed. Most indices show modest losses as investors ponder the potential impact of a strong dollar and higher (core) yields. Japanese eco data were stronger than expected. Above consensus inflation data particularly caught the eye. Japanese yields traded marginally higher, but the rise remains modest given what happened in the US and Europe yesterday. USD/JPY trades in the 105.15 area. Japanese equities outperform on the weaker yen/stronger dollar. EUR/USD shows no clear direction and holds near 1.09.
Today, the eco calendar is well filled. In EMU, EU economic sentiment is expected to have stabilized at 104.9. Given the better PMI's and IFO, we see risks on the upside of consensus. German HICP inflation is expected to climb to 0.7% Y/Y from 0.5% Y/Y previously. It would be the highest level in about two years. Any upward surprise wouldn't go unnoticed in the current climate. In the US, Q3 GDP is expected to be up 2.5% Q/Qa, but after the trade and inventory data, it could be closer to 3%. Markets shouldn't be too surprised by such outcome. PCE and core PCE deflators are expected a bit lower at 1.4% and 1.6% respectively. Earlier this week, the eco data had only limited impact on global trading. However, this will probably be different today. If the data, especially the US Q3 growth data are stronger than expected, it might reinforce the uptrend in core bond yields. This will probably support the dollar further. Of late, USD/JPY profited most from the rise in global yields. After yesterday's break above 104.85/105, this trend might continue. The reaction of EUR/USD to rising yields was less straightforward. Wednesday's/yesterday's uptick in EUR/USD was limited even as interest rates moved in favour of the euro. In case of good US eco data, the dollar might again take the lead, also against the euro. The recent low around EUR/USD 1.0850 might again come under pressure. Whatever the outcome of the data, the Fed rate hike expectations put a solid floor under the US currency. So, the MT trend remains USD-positive. The US data have to be really bad to reverse USD sentiment in a profound way.
From a technical point of view, EUR/USD dropped below 1.0952/13 support. The break is an extra USD positive and opens the way to next intermediate support (1.0822/1.0711). USD/JPY tested the 104.32/64/87 several times.
Yesterday the pair broke above the 105 barrier. This break paints a double bottom formation on the charts with targets in the 108/109 area. Of late we were cautious to pre-position for a break higher in USD/JPY as we feared that a rise in global (equity) volatility could prevent a further yen decline. However, currently , the rise in US/core bond yields clearly dominates as a driver for USD/JPY trading. So, we change our ST assessment on USD/JPY from cautious to positive and join the trend as long as the rise in yields continues.
Has sterling ‘rebound' run its course?
On Thursday, UK Q3 growth was again reported substantially stronger than expected (0.5% Q/Q and 2.3% Y/Y) with growth based in the services sector.
Industrial production and construction contributed in a negative way. Sterling gained temporary ground after the publication, but the gains could not be sustained, even as short-term UK bond yields trended higher, too. The CBI reported sales also printed stronger than expected, but had also no lasting positive impact on sterling. Markets likely don't expect the Q3 growth rates to be sustained, as the Brexit debate continues. The ongoing rise in EMU and US yields probably also prevented sterling gains. Later in the session, the UK Secretary for Scotland again spoke harsh on the chances of the UK staying in the EU internal market. The comments may have added to the intraday correction off sterling. On a daily basis sterling even closed the day in the red both against the euro (0.8958) and the dollar. (1.2164).
Overnight, the UK GFK consumer confidence was in line with expectations (-3 from -1). Later today, there are no important eco data in the UK. Over the previous days, sterling traded on a more solid footing. However, yesterday's failure of sterling to profit from strong eco data suggests that the upward correction has no strong legs. We look out whether the recent sterling rebound has run its course. Higher core rates and rising global volatility probably won't help sterling. We look to sell sterling on more pronounced up-ticks. EUR/GBP 0.8725 remains a key reference. Political event risk remains a lasting source of sterling uncertainty.
Author
KBC Market Research Desk
KBC Bank
