‘Softer' Powell to cause further USD correction?

KBC Market Research Desk KBC Bank

Yesterday, the dollar traded with a tentative negative bias but moves were limited. US retails sales were strong and suggest solid Q2 growth but had no lasting impact on the dollar. A sharp new down-leg of oil also didn't help the US dollar. EUR/USD closed at 1.1711 (from 1.1685). USD/JPY finished at 112.29 (from 112.38). There was also a lot of turmoil on president Trump's diplomacy in Russia, but it had no noticeable impact on (FX) markets. Overnight, Asian equities are mostly in negative territory. Lingering trade tensions, a sharp decline of oil and a setback in the Nasdaq future (disappointing Netflix results) are weighing. Still, the the major USD cross rates are holding tight ranges with EUR/USD near 1.1720 and USD/JPY near 112.40. New Zealand headline inflation was slightly softer than expected, but the kiwi dollar profited from a rise in a core measure closely monitored by the RBNZ. NZD/USD rebounded to the 0.6840 area. A tentative sign of a bottoming out process for the kiwi? Today, the eco calendar is thin with only US production data. Production is expected fairly strong at 0.5% M/M. However, the focus for FX trading will be on the semiannual testimony of Fed Powell before the Senate. At the June meeting, the Fed was positive on the economy and the dots signalled a rising chance of 2 additional rate hikes this year. The Fed president probably won't backtrack on his positive view, but there is also no reason to reinforce the scenario of two additional hikes in a context of rising trade tensions. If so, the dollar won't get much additional interest rate support. EUR/USD is holding the 1.15/1.1850 trading range. As the downside looks blocked, there maybe is room for EUR/USD to go back higher in the range.

Yesterday, UK PM May again faced a turbulent session in Parliament. The row between pro-Brexit support and support of a soft Brexit hardened as the government accepted amendments from the pro-Brexit camp to the Customs bill. The Brexit noise propelled EUR/GBP back higher to the 0.8850 area. Today, the UK labour data will be published. The focus remains on wage growth. A decent report might be enough for the BoE to raise rates in August. However, wage growth probably has to bring a big upside surprise to trigger any sustained GBP gains. The Brexit sage continues in Parliament (Trade Bill). As the Brexit chaos won't disappear soon, we see little reason for a sterling comeback. More consolidation in the EUR/GBP 0.88 are might be on the cards.

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KBC Market Research Desk

KBC Bank

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