KBC Market Research Desk
KBC Bank
There was no high profile news to guide trading in the major FX cross rates yesterday. The risk-off correction slowed, but at first there was no sustained rebound. Sentiment improved later in the session. US equities finished the session with decent gains. US House and Senate approved a two-week stopgap funding deal after the US close, providing funding for the US government till Dec 22. Gains of the dollar were modest, but the announcement supported an overall constructive market sentiment. EUR/USD closed the session at 1.1773. USD/JPY finished at 113.09.
Asian equities are extending yesterday's comeback overnight with Japan taking the lead. The economic news flow was mostly positive. Japan Q3 GDP was revised sharply higher from 1.5% Q/Qa to 2.5% Q/Qa, propelled by strong business investment and by a rise in inventories. Japanese real wages rose (0.2% Y/Y) in October. Chinese November imports and exports also beat the consensus by quite a big margin, supporting regional sentiment. The overall positive sentiment via higher core yields supports the dollar rather than regional currencies. USD/JPY extends gains north of 113 (currently 113.40). EUR/USD (1.1765) is holding near recent lows.
US November payrolls provide the last important economic input going into next week's Fed meeting. The US economy is expect to have added a net 195 000 jobs. The jobless rate is expected unchanged at 4.1%. However, the market focus will be on wages/earnings data. Average hourly earnings are expected to rise 0.3% M/M and 2.7% Y/Y, after disappointing readings in the previous months (0.0% M/M and 2.4% Y/Y in October). If payrolls, and wages in particular, are in line with the consensus (or better), it might already be enough to sustain a gradual further rise of the dollar. Markets could question the Fed rate hike path in 2018 in case of a big miss. We have no reason to expect the data to undershoot the consensus. Maybe there is a slight risk for a rise in the unemployment rate after last months unexpected decline, but that won't bother markets. This morning, politics dominate the headlines. The news flow (US spending bill and Brexit deal) might support support core yields and the dollar. However, the payrolls probably hold the key for the next directional move. We see a good chance for the payrolls' outcome to sustain this week's gradual USD comeback.
From a technical point of view: EUR/USD set a post-ECB low mid-November, but the dollar's momentum wasn't strong enough. EUR/USD settled in a directionless sideways consolidation pattern in the 1.18/19 area. A return below 1.1713 would signal an improvement in the ST USD momentum, going into next week's Fed meeting. Will today's payrolls be able to force the break? Next support comes in at 1.1554 (November low). USD/JPY's momentum deteriorated early November, dropping below the 111.65 neckline. No aggressive follow-through selling occurred though. Last week the pair succeeded a nice rebound, calling off the downside alert. The pair returned again in the 110.84/114.73 consolidation range. We amended our ST bias from negative to neutral. We maintain the view that a sustained break north of 115 won't be easy.
EUR/GBP tests 0.8733 support on Brexit deal
There was little hard news on Brexit yesterday. Sterling was captured in erratic order-driven trading for most of the day. In the evening, rumours/comments from sources close to the UK/Irish government and the European commission suggested that an agreement on the Irish border was within reach and that a deal could be finished as soon as Friday morning. Sterling rallied and EUR/GBP closed the session at 0.8737, testing a first key support area. Cable finished the day at 1.3474.
This morning, all eyes were on Brussels as PM May and EU commission chairman Juncker met at 7 AM. In a press conference, EU's Juncker said that the European commission considered that enough progress had been made on a divorce deal. It recommends the EU leaders to move to the next stage of the negotiations, to be confirmed at next week EU summit. At the time of writing we have no details of the content of the agreement yet. Sterling rallied in the run-up to the announcement of the deal, but the rally slowed during the press conference. EUR/GBP currently hovers in the 0.87 area. For now we remain cautious on further sterling gains from here as long as we have no insight on the details of the deal, e.g. with respect to the Irish border. From a technical point of view, EUR/GBP tries to break first support at 0.8733. In case of a sustained break, next intermediate support comes in in the mid 0.86 area.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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