Post-Fed dollar losses remain limited

On Thursday, the post-Fed global momentum drove USD trading. Dollar softness was the name of the game in Europe and early in the US as monetary conditions were expected to remain soft for long. EUR/USD set an intraday top in the 1.1257 area. Later in the session, the dollar correction eased. A modest rise in US/German interest rate differentials intraday might have helped to put a floor for the dollar. EUR/USD closed the session at 1.1208 from 1.1189. The price pattern of USD/JPY was slightly different. The pair touched a correction low just north of 100 in Asia, but regained gradually ground later on the global equity rebound. USD/JPY closed the session at 100.76 (from 100.32).

Overnight, Asian equities trade narrowly mixed, talking a breather after recent gains. Japanese/Asian markets try to find out how to the new post-BOJ policy framework works. At least for now, the BOJ-pledge to steepen the yield curve doesn’t work yet as 10-y yields decline below the 0% target. Overnight, the dollar is stronger across the board, further reversng yesterday’s initial post-Fed softness. In this move USD/JPY tries to regain the 101 barrier, but the move is not really convincing even as Japanese government officials signal that Japan is ready to act if excessive FX sensitivity continues. The dollar trades also slightly stronger against the euro with EUR/USD changing hands just below 1.12.

Today, the focus turns to the euro area with the first estimate of the PMI’s for September, while in the US the Markit manufacturing PMI will be released.
ECB’s Constancio & Weidmann and Fed’s Harker, Mester, Lockhart and Kaplan are scheduled to speak. Last month, the euro area composite PMI dropped to its lowest level since early 2015, from 53.2 to 52.9. For September, the consensus expects a limited further drop to 52.8. Last month, weakness was mainly based in the manufacturing sector. For September, a further drop in the manufacturing PMI from 51.7 to 51.5 is expected. We see risks for a weaker outcome as sentiment seems to have soared after the initial Brexit optimism.
For the services PMI, a stabilisation at 52.8 is forecast. Also here, we see risks for a weaker outcome. Central bankers speeches are a wildcard. We look out for the reaction of European yields in case of a weak PMI. If yields decline further, it could be a slightly negative for the euro. Of course, European yields declined already substantially yesterday. So, a further drop is not that evident.

EUR/USD tested the 1.1123 support before the Fed, but the test was rejected as the dollar couldn’t maintain its post-BoJ gains. Later, the USD lost some further ground after the Fed decision. We assume that the Fed decision hasn’t changed the broader picture for EUR/USD. Markets will be sensitive whether the data support the case for a December rate hike. Swings in December rate hike expectations will probably be the driver for USD trading going forward. The dollar might lose slightly further ground short-term, but as long as the market implied probability of a Fed rate hike remains at current levels, the downside of the dollar looks well protected. For now, we prefer more range trading in the 1.1123/1.1366 range and a sell-on-upticks approach. USD/JPY was in the defensive of late. Markets were reluctant to hold big yen shorts going into the BOJ policy decision. The post-BOJ decline of the yen was very short-lived and reversed. We stay cautious on USD/JPY long exposure. However, the 99.54/99.02 area will remain a strong support. 104.32 is the first main resistance. We expect the established 99.89/104.32 range to hold, but downside risks have grown post BOJ/FED.

Sterling consolidation continues, for now

Dollar softness after the Fed policy decision drove initially the the intraday moves in cable and EUR/GBP. The dollar traded softer against most other majors, including sterling. Cable rebounded to the 1.31 area, compared to levels in the 1.2960 area pre FOMC. In the dollar decline, EUR/USD initially slightly outperformed cable, sending EUR/GBP marginally higher. However, in the afternoon sterling was supported by hawkish comments from BoE’s Forbes, questioning the need for further easing. Cable set an intraday top in the 1.3120 area, but closed the session at 1.3078 as the dollar rebounded later in the session. The EUR/USD rally initially pushed EUR/GBP north of 0.86, but the pair declined later on an EUR/USD setback and sterling strength (Forbes). EUR/GBP closed the session at 0.8570 (from 0.8587).

Today, the UK calendar is empty. So, global factors will set the tone for GBP-trading. Some euro softness might weigh slightly on the euro. The hawkish quotes from BOE Forbes might have created some doubts on the BoE’s commitment to ease policy further. However, Forbes is probably in the minor (hawkish) group. So, we expect some further consolidation in the major sterling cross rates today. Since mid this week, sterling entered calmer waters. This process might continue, as global sentiment on risk might remain mostly supportive. However, the fear for a hard Brexit might still resurface. In this context, we don’t expect any GBP rebound to go far. A sell sterling on upticks approach remains preferred.

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