Senate vote spending bill key for USD short-term?

KBC Market Research Desk KBC Bank

The dollar couldn't sustain early-day gains yesterday. Especially USD/EUR showed signs of weakness. The interest rate differentials widened again slightly in favor of the dollar. It was not enough to help the US currency, as was often the case of late. US data were mixed. Uncertainty on a US government shutdown capped further US equity gains and weighed on the dollar. USD/JPY finished the day at 111.11. EUR/USD closed the session at 1.2238.

Asian equities remain in good shape, but the positive risk sentiment doesn't help the dollar. The trade-weighted dollar (DXY) trades at 90.38 (near the cycle low). USD/JPY dropped back below 111 and AUD/USD surpassed the 0.80 mark. EUR/USD also regained a few more ticks even as US yields are at recent highs/key resistance levels.

The debate on the US spending bill and US consumer confidence (University of Michigan) are the main topics today with potential to move FX markets. Consumer confidence is expected to rebound after a setback in the previous two months. Recent US business sentiment indicators didn't profit much from the tax reform. So we are a bit cautious. A US government shutdown would weigh on the dollar. If a shutdown is avoided, US yields might break key resistances (see fixed income part). Will this be enough to improve USD sentiment? This weekend's SPD decision whether or not to start formal talks to form a German government are also important for European markets.

Global Picture: The dollar remains in the defensive as markets prepare for a change in policy from central banks outside the US. This propelled EUR/USD despite a huge interest rate differential in favour of the dollar. The USD decline slowed this week, but the ‘rebound' remained unconvincing from now. A return below previous resistance at 1.2092 is needed to call off the ST alert for the dollar. EUR/USD 1.2598 (62% Retracement) is next important resistance on the charts.

The December UK retail sales are expected to decline 1.0% M/M after a strong November figure. A positive surprise (smaller decline) is possible. Activity data are not the most important issue for (FX) trading. Even so, sterling showed some underlying resilience recently. A break of EUR/GBP below 0.8810 would open the way to the 0.87 range bottom, which we consider solid support. Some further correction within the established range is possible.

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KBC Market Research Desk

KBC Bank

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