Modest USD profit taking ahead of the Fed
On Monday, the post‐ECB repositioning slowed. Ongoing high core bond yields still supported the dollar in Asia, but the rally petered out in Europa. There was little hard news to guide trading. Interest rate differentials between the euro and the dollar didn't change much. Even so, the dollar fell prey to cautious profit taking. The move continued in US trading, as US yields softened a few basis points. EUR/USD rebounded north of 1.06 and closed the session at 1.0635 (from 1.0561 on Friday). USD/JPY also drifted off the Asian top (116+) and finished the day at 115.02 (from 115.32).
Overnight, Asian equities show a mixed picture. Chinese equities are again underperforming. Higher domestic yields and technical factors are probably behind the move. Most other regional markets show modest gains with Japan outperforming on the yen. USD/JPY traded temporary below 115 early in Asia, but is currently again trading in the 115.35 area. EUR/USD is locked in a tight range in the 1.0629/1.0650 area, holding with reach of yesterday's correction top (1.0652).
Today, the US eco calendar contains only the November small business sentiment (NIFB) and import prices. Small business sentiment is expected to be strong mirroring the ISM surveys. However, it is no market mover and neither are import prices. In Germany, the November ZEW economic sentiment survey will be published. Both expectations (14 from 13.8) and current situation (59 from 58.8) indices are expected little changed. An upward surprise is possible, but the market reaction will probably be limited. So, USD traders will continue to count down to tomorrow's Fed decision. Yesterday, investors took some profit on the recent USD rally, but losses were modest. Today, some more consolidation ahead of tomorrow's Fed decision might be on the cards. It will probably be difficult for the dollar to take out its recent highs against the euro (EUR/USD 1.0506 area) and the yen (USD/JPY 116.12) before the Fed policy announcement. Even so, the USD uptrend remains intact.
In a longer term perspective, the context remains USD constructive/euro negative. Low absolute short‐term EMU yields are weighing on the euro. At the same time, there is underlying USD strength supported by higher LT core yields. With the ECB prolonging substantial bond buying at least till end 2017, the Fed keeps the lead in the policy normalization. This puts a strong floor under the dollar. Short‐term interest differentials will remain wide and might even widen more as the Fed extends a gradual rate hike path in 2017. From a technical point of view, last week's rejected test of the 1.0795/1.0809 area suggests that the topside of EUR/USD is well capped. The 1.0506 correction low and the 1.0458 cycle low are the next support levels in EUR/USD.
The technical picture for USD/JPY improved some time ago. The pair took out the key resistance at 111.45/91. Last week, the USD/JPY rally took a breather, but the pair tries to sustain north of the next resistance area at 114.50/115. For now, the downside in USD/JPY looks well protected as long as sentiment on risk remains constructive. Even in case of an equity correction, the damage for USD/JPY might be modest, as interest rate differentials have become more important. Also for USD/JPY, we favour the upside.
EUR/GBP hardly profits from EUR/USD rebound
On Monday, EUR/GBP initially rebounded from the 0.8363 Asia low and returned temporary north of 0.84, supported by the rise of EUR/USD. However, around noon sterling again found a better bid, both against the euro and the dollar.
Trader talk also still mentioned ongoing sterling short‐covering, while legal action to amend the UK government's Brexit strategy has been slightly GBP supportive. EUR/GBP closed the session unchanged at 0.8388. Cable traded with a positive bias (dollar softness) and closed the session at 1.2679 (from 1.2572).
Today, the UK inflation data will be published. A rise of 0.2% M/M and 1.1% Y/Y is expected for the headline CPI (from 0.9% Y/Y). Core inflation is expected at 1.3% Y/Y from 1.2% Y/Y. Until now, higher import prices due to decline of sterling didn't reach the consumer yet. However, input producer prices rose already quite sharply. Any indications of prices rises filtering through into consumer prices might reinforce the idea that a BoE rate cut is becoming ever less likely and might be slightly positive for sterling short‐term, especially as sentiment on sterling is constructive. So, for now it still looks a bit too early to row against the sterling positive momentum. From a technical point of view, EUR/GBP extensively tested 0.8333/05 support early last week, but a sustained break didn't occur. This area is an important point of reference. It won't be easy for EUR/GBP to drop below it. So, despite recent sterling strength, we look for confirmation that a bottoming out process is in place.
Author
KBC Market Research Desk
KBC Bank
