Sterling drops below important technical levels

KBC Market Research Desk KBC Bank

End week and on Monday, EUR/USD failed to take out first resistance near 1.1285 even as Fed's Powell kept the door open for a July rate cut. Yesterday, EUR/USD declined further in the 1.12 figure. The move was partially dollar strength supported by solid US retail sales. A pinch of euro weakness was also in play as German ZEW confidence disappointed again. Late in the session, US yields reversed most intra-day gains as Fed's Powell reiterated its dovish message from last week. Still the dollar maintained most gains. EUR/USD closed at 1.1211 (from 1.1258). USD/JPY held north of 108 to close at 108.25 (from 107.91)

This morning, Asian equities mostly show modest losses, in line with WS yesterday. Trade tensions resurfaced as a (minor?) factor for trading as US president Trump reiterated the US can still impose tariffs on $ 325 bln of Chinese goods. The direct impact on the dollar is limited. EUR/USD hovers in the 1.1210/15 area. USD/JPY is losing marginal ground (108.15 area). USD/CNY is still going nowhere (6.88 area).

The eco calendar is only moderately interesting today with the final EMU CPI's (expected 1.2% headline, 1.1% Core). In the US, housing starts and permits will be published. US housing data recently had only a limited impact on FX. There is a slight chance of a upward revision to the EMU CPI, but it probably won't change fortunes for the euro in a profound way. The global risk sentiment looks like easing a bit as the record rally of US equities ran into resistance yesterday. If this would lead to lower core yields it might be a slight USD negative. Still, we see no big case for EUR/USD to break out of the 1.1285/1.1181 ST range.

Global picture: EUR/USD drifted lower in the 1.11/1.14 range but rebounded from recent lows after Powell paved the way for a July rate cut. A rebound to the 1.13 would further ease the downside momentum. With the most important eco data before the FOMC July meeting printed, we expect more range trang near current levels.

Sterling declined further as both candidates to become UK PM hardened their stance for talks with the EU. EUR/GBP settled north of 0.90. Cable dropped below the 1.2440 support. Brexit remains key for sterling trading, but UK CPI data are interesting, too. Headline CPI is expected unchanged at 2.0% (core to rise to 1.8%). CPI's probably won't change markets' view that the BoE will likely be forced to cut rates due to the growing negative impact of Brexit on the UK economy. Sterling probably remains in the defensive. EUR/GBP 0.91 area is the next key reference.

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KBC Market Research Desk

KBC Bank

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