Payrolls fail to guide USD trading

KBC Market Research Desk KBC Bank

The dollar showed no clear trend on Friday. Thursday's rise in core yields was partially reversed with EMU yields declining more than US ones, putting modest pressure on euro ahead of the US payrolls. The labour report was mixed, but OK. Still, the dollar lost temporarily ground after the release, but rebounded later as Fed's Powell downplayed the risk for a US recession. At the same time, he kept the door open for another pre-emptive rate cut in September. EUR/USD finished the day at marginally lower at 1.1029. USD/JPY closed little changed at 106.92.

Overnight, Asian equity markets mostly trade in positive territory as the PBOC reduced the RRR last week. At the same time, China August trade date disappointed (both imports and exports). Still the yuan is trading off its recent lows (USD/CNY 7.1240). USD/JPY hovers near/just below 107. EUR/USD is going nowhere 1.1025/30 area.

There are few important data in the US and Europe today. The eco calendar is mostly backloaded this week with the US CPI and the ECB policy decision on Thursday. US retail sales and consumer confidence will be published on Friday. The market expects substantial ECB easing (at least rate cut). The euro will probably stay in the defensive going into Thursday's ECB decision. However, we are not convinced that Draghi will be able to provide the high amount stimulus some in the market are hoping for.
The August USD rally halted early last week on poor US manufacturing data. EUR/USD regained the 1.10 mark. We expect technical, euro cautious trading ahead of the ECB meeting. The euro might regain some further ground if the ECB doesn't deliver on high expectations and/or if the market feels that the bank has only limited ammunition left. From a technical point of view, EUR/USD shows tentative signs of bottoming. A return north of 1.11 would call off the ST negative alert for EUR/USD.

The recent sterling rebound halted last Friday. The UK Parliament last week blocked a no deal Brexit. However, the next steps in the political (Brexit) process remain highly uncertain (elections? When?). Ongoing talks with the EU apparently also don't yield much progress.
Last week, sterling rebounded to the EUR/GBP mid 0.89 area. This sterling rebound might slow if/as long the political chaos in the UK persists. Some return action back higher north of EUR/GBP 0.90 might be on the cards shortterm.

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KBC Market Research Desk

KBC Bank

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