Sterling rebound continues

Gradual dollar correction continues

Yesterday, USD trading took a slow start this week. President Trump underscored its protectionist intentions (the US pulled out of the TPP agreement), causing a modest risk-off context. The correction of US equities was modest, but US yields fell a few basis points, weighing on the dollar. US Treasury Secretary nominee Mnuchin said that an excessively strong dollar could have a negative short-term effect on the economy. The comments were an additional USD negative. EUR/USD closed the day at 1.0765 (from 1.0703). USD/JPY initially drifted mostly sideways in the mid 113 area but finished the session at 112.71 (from 114.62).

This morning, the weak dollar is again a mixed factor for Asian markets. Most regional indices trade with a slightly positive bias, but Japan, as usual, underperforms on a stronger yen. For now, the US leaving TPP has only a limited impact on regional equities. Even so, the US protectionist stance continues to weigh on the dollar. USD/JPY struggles not the fall below the 113 big figure. EUR/USD is changing hands in the 1.0750. US Treasury Secretary nominee Mnuchin also said that he will examine the negative impact of China’s FX interventions/manipulation on the US, but his tone was not too harsh.

Today, January EMU PMI’s are expected broadly stable at 54.8 for the manufacturing and 53.8 from the services sector. Given past gains, we expect a strong report, but not necessarily stronger than in December. In the US, the Richmond Fed survey (decline from 8 to 6 expected) and existing home sales (decline from 5.61M to 5.5M expected) will be published. The risks for the Richmond Fed are on the upside given strong results in the NY and Philly Fed surveys. The UK Constitutional Court’s verdict on Brexit and the decision on the Italian electoral law are interesting. The former may delay triggering article 50. So, the eco data will probably be constructive, but the implementation of further policy steps of the Trump administration and, to a lesser extent, political issues in the UK and Europe are a factor of global market caution. This might weigh on core yields and on the dollar. For now, the negative impact on the dollar is modest. Sentiment on the dollar might again turn positive as soon as the Trump rhetoric shifts again from protectionism to fiscal stimulation via tax cuts and/or infrastructure works. However, in a day-to-day perspective, sentiment on the dollar remains slightly negative.

Global context: EUR/USD touched a multi-year low (1.0341) early this month. After the Trump rally, plenty of good USD news was discounted while US/EMU rate differentials narrowed (correction), causing a dollar correction. Longer-term, the absolute interest rate support should provide a USD floor if US data remain good and as long as there are no profound doubts on Trump’s pro-growth policy. The day-to-day USD momentum deteriorated as EUR/USD rebounded north of 1.0685/1.0719. A return above 1.0874 would question the USD positive outlook. On the downside, EUR/USD 1.0341 is the first key support. USD/JPY is trading well off the post-Trump highs (118.60/66). The pair tries to rebound off the 112.57 reaction low, but the jury is still out whether this can be sustained. 111.16 (38% retracement of the 99.02/118.66 rally) is a tough support. An equity correction or a decline in core bond yields would be short-term negatives for USD/JPY.

Sterling rebound continues

Yesterday, sterling resumed the rebound started after UK PM May’s Brexit speech even as the UK PM clearly indicated that the UK will seek a ‘clean Brexit’. The removal of some of the Brexit-uncertainty and the market positioning (short-sterling) is a (short-term?) positive for sterling. Sterling investors maybe also anticipate that the UK high Court will confirm a significant role of Parliament in the Brexit process in today’s ruling. Whatever the reason, sterling extended its comeback. EUR/GBP finished the day at 0.8588 (from 0.8652). Cable rebounded north of 1.25.

Today, the UK public finance data will probably only be of second tier importance. The focus will be on the UK high Court ruling. A ruling that parliamentary approval is necessary might complicate the time table of the government. However, the market often sees it as easing the risk for a hard Brexit. So, for now, it is too early to assume that the ruling will immediately change the short-term sterling positive momentum. We still wait for a signal that the rally is losing momentum. Last week, sterling held strong even as UK PM May hinted on a hard Brexit. Longer term, we don’t see a big case for a sustained sterling rebound. We look to sell sterling into strength as long as there is no clear indication that the BoE will take action to fight rising inflation. EUR/GBP 0.8579 marks the 50% retracement of the 0.8304/0.8854 rebound. EUR/GBP 0.8515 is the 62% retracement level with a correction low coming in at 0.8451. This 0.8515/0.8451 area should provide a strong support.

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