Sterling extends gradual comeback, for now

KBC Market Research Desk KBC Bank

Healthcare vote to decide on next USD move

On Thursday, USD indecisiveness prevailed as markets waited whether the Trump administration would be able to pass a first vote to repeal Obamacare. USD/JPY traded with a slight negative bias and closed the session at 110.94 (from 111.16). EUR/USD finished the session at 1.0783 (from 1.0797). So, the dollar continued to hold up better against the euro than against the yen, with EUR/USD staying away from the key 1.0829/1.0874 resistance.

Overnight, markets see a rising chance that the changes to the healthcare Bill will get enough support from the House Freedom Caucus to pass the House vote. This supports risky assets (equities) in Asia.. USD/JPY is off yesterday’s lows and trades again round 111.50. EUR/USD (1.0765/70 area) is also drifting cautiously south.
The dollar rebound is supported a slight rise of US yields. Of course, the Trump-care is no done thing yet.

The eco calendar contains two interesting reports. In EMU, PMI business confidence is expected slightly softer (55.8 in March from 56. After recent regional sentiment data, we put the risks for the EMU PMI on the downside of expectations. However, confidence remains at a healthy level. The US durable orders are expected to have risen 1.3% M/M, following a 2% M/M rise in January. We support the consensus view and have no arguments to deviate, but the report is very volatile in nature.

In a day-to-day perspective, the eco data (potentially softer EMU PMI and decent US durables) might be intrinsically USD supportive. However, the focus will be on the vote on Trump-care. An approval (most ‘likely’ scenario?) might trigger a short-term relief rally in equities and the dollar. However, this rebound likely won’t go far. The bumpy road ahead of the vote suggests more difficulties when other key issues (taxes etc) will be brought to Congress. So, more other USD positive news is needed to really call an end to the recent period of USD softness. A failure to pass the bill is USD negative with probably a confirmation of the downside break in USD/JPY. In that scenario, EUR/USD might go for a test of the 1.0829/74 area. A break is possible, but far from sure. We still doubt that the EUR/USD has really big upside potential if sentiment on risk were to turn outright negative.

In a longer term perspective, we don’t change our USD-constructive bias based on the eco fundamentals. However, this doesn’t tell anything on the short-term momentum dynamics.

Sterling extends gradual comeback, for now

Sterling remained well bid yesterday and EUR/GBP traded with a slightly negative bias going into the publication of the UK retail sales. The ONS February retail sales (1.4% M/M and 3.7% Y/Y) were stronger than expected. Sterling rallied further and EUR/GBP dropped to the low 0.86 area. Cable jumped to the 1.25+ area.
However, the sterling rally ran into resistance even as the CBI retail data (published at noon) also suggested decent retail activity in March. Sterling is currently apparently more sensitive to (better than expected) price data, rather than activity data. EUR/GBP closed the session at 0.8612. Cable finished the day at 1.2521.

Overnight, BoE Vlieghe in a press article said that higher inflation didn’t mean a rate increase. He wants evidence on strong wage growth before considering voting for a rate hike. Sterling is losing a few ticks this morning. Later today, only the BBA loans for Home Purchases are scheduled for release. Last week, sterling found a better bid after the early March decline. Some time ago, EUR/GBP cleared 0.8592 resistance, improving the MT technical picture. However, this week’s (substantially) higher than expected UK inflation probably put a decent floor for sterling short-term. We changed our short-term bias on EUR/GBP from positive to neutral. Some further consolidation in the 0.85/0.88 area might be on the cards. Longer term, Brexit complications remain a potential negative for sterling, but this issue isn’t in the spotlights right now. We are not convinced that the BoE will raise rates anytime soon, even not after this months’ higher inflation data.

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KBC Market Research Desk

KBC Bank

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