Dollar looking for new guidance
On Tuesday, USD trading was technical in nature in absence of important (eco) news. Both USD/EUR and USD/JPY hovered in a sideways range. At the end of the session, the dollar traded still marginally lower against the yen, but regained some ground against the euro after Monday’s setback. EUR/USD finished the day at 1.0554 (from 1.0574). USD/JPY closed the session at 115.77 (from 116.03).
Overnight, most Asian equities are trading positively, with China being the exception. Despite the rise in commodities and commodity related assets, the dollar is trading marginally stronger. USD/JPY hovers in the 116 area. EUR/USD drifted back south and is currently trading in the mid 1.05 area.
Today, the eco calendars in EMU and the US are again almost empty. So, the market focus will be on a press conference of president-elect Donald Trump. We don’t know its exact timing. Markets have high expectations about the changes in taxation, investment infrastructure and (de)regulation, but other issues like immigration and protectionism may be tackled too. Markets anticipated a much easier fiscal policy via lower taxation and higher infrastructure spending. Will Trump be able to satisfy the high expectations? If he fails to do so, there is room for some further USD correction. On Friday, a decent US payrolls report put a temporary floor under the USD correction. Most Fed comments at the end of last week were also moderately hawkish/USD supportive. However, a modest dollar correction resumed on Monday and the US currency basically drifted sideways yesterday, awaiting new guidance . We don’t think that recent US softness will mark the start of a trend reversal, but the USD momentum clearly eased and the correction can still go a bit further. In this respect, we keep an eye on the interest rate developments as spreads between the US and Europe show signs of topping out.
Global context: EUR/USD touched a new multi-year low at 1.0341 last week. After the Trump rally, there is a lot good USD news discounted. Interest rate differentials between the dollar and the euro remain very high, but didn’t widen anymore of late, slowing the rise of the dollar.The big absolute interest rate support should provide a solid USD floor as long as US data are good and there are no profound doubts on the ability of the Trump-administration to execute its pro-growth agenda. A buy the dollar on dips strategy remains preferred. EUR/USD 1.0653/70 is a first resistance. A return north of 1.0874 would question the USD positive momentum. On the downside, EUR/USD 1.0341 is still the first key support. A test of parity remains possible MT. USD/JPY started a correction last week and the pair is still slightly in the defensive. 114.74/115.07 marks a first support. A break below that level would be a short-term negative. We stay USD/JPY positive long-term, but are in no hurry to rush in right now. An equity correction or a further decline in core yields might be a short-term negatives for USD/JPY. The 118.60/66 resistance is a tough area to break short-term.
Sterling correction halts, for now…
On Tuesday, sterling initially remained under pressure extending Monday’s decline on Brexit comments from PM May. EUR/GBP extended its rally north of 0.87 and touched a new intraday top in the 0.8760/65 area. Later in the session, EUR/GBP turned again below the 0.87 barrier in technical trading. The pair closed the session at 0.8667 (from 0.8694). The decline of cable also halted. The pair closed the session at 1.2177 (from 1.2163). So, sterling entered calmer waters as the Brexit tensions returned to the background.
Today, the UK calendar contained the production, the trade balance and the, construction output data besides the monthly NIESR GDP estimate for September. Of late, UK activity data were very good, but had hardly an impact on sterling trading. For the trade balance, there is again a substantial widening of the deficit expected. If confirmed, it is a slightly sterling negative. BoE governor Carney will be heard by the Parliament’s Treasury select committee. The hearing will address financial stability issues and not monetary policy. Even so, the BoE governor might still face some tough questions on monetary policy. High profile headlines on a rift regarding Brexit might also be slightly negative for sterling.
Sterling held strong in November and December, but lost some momentum in the second half of last month. EUR/GBP held a sideways trading pattern in the 0.85 area. Uncertainty on the next steps in the Brexit debate are again weighing on sterling in the run-up to the end of March article 50 deadline. We prefer a buy-on-dips strategy for EUR/GBP. If the break beyond 0.8668 is confirmed, it would improve the EUR/GBP picture.
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.