Sterling rebound slows ahead of article 50 triggering

USD holds near recent lows, but decline slows

The correction on the reflation trade initially continued yesterday as investors were uncertain about the impact of the failure to pass a new US healthcare bill. Equities and the dollar were sold. Later in the US session, the risk-off trade eased and so did the decline of US/core bond yields and of the dollar. Still the US currency remained relatively close to the recent lows against other majors. EUR/USD finished the session at 1.0864 (from 1.0798 on Friday). USD/JPY closed the session at 110.66.

Overnight, Asian equities join yesterday’s intraday rebound in the US. However, the gains outside Japan and Australia are modest. This is also the case for the comeback of the dollar. USD/JPY rebounded temporary to the 110.80 area, but returned soon to the mid 110 area. EUR/USD hovers in the 1.0865 area. So, yesterday’s top just north of 1.09 is still within reach. On the EU side of the story, the euro is probably supported by comments of German ECB members Weidmann and Lautenschlaeger. They kept the debate alive that the ECB should consider scaling back policy stimulation in a not-that-distant future.

Today, there are no EMU eco data. In the US, the advance trade balance, consumer confidence (conference board) and the Richmond Fed manufacturing index will be published. Consumer confidence has probably most market moving potential. The consensus expects a small setback from 114.8 to 114. Recent indicators of consumer confidence were strong, but a slight setback given the very high level is possible. From a market/USD point of view, the question is whether the US data will be strong enough to reverse recent market doubts on the US reflation trade and on the dollar. A good figure might help, but more USD positive news is needed to restore confidence in the dollar. There is also again a long list of Fed and ECB speakers. ECB comments might be at least as important as Fed speakers. Yesterday, the intra-ECB division became again apparent with the German ECB members advocating scaling back policy stimulation. At the same time ECB Chief economist Peter Praet defended the current soft ECB approach.

In a day-to-day perspective, markets will look whether the correction on the US reflation trade eases further. This process will take time. USD/JPY might try to build a bottom in the 110 area.

However, it is too early to conclude that the correction has already run its course. A similar reasoning applies for EUR/USD. Sentiment on the dollar was fragile. At the same time, the internal ECB debate on whether or not scaling back policy stimulation continues. This puts a floor for the euro, at least short-term. A new downleg in EUR/USD probably has to come from better news from the US, halting the decline in the US/Euro (German) interest rate differential. We are not at this point yet. So, EUR/USD might hold near the recent highs and even (slight) further upticks are still possible even as we don’t expect a sharp break higher.

From a technical point of view, the picture of USD/JPY remains fragile as it clearly dropped below the 111.60/36 support. Next support kicks in at 108.84 (50% retracement of the MT up-move). EUR/USD is extensively testing the 1.0829/1.0874 resistance. A break beyond this level would deteriorate the MT picture for the dollar. Chances on a break of this level are growing. However, we don’t expect a real protracted rally of the euro against the dollar already now. The absolute interest rate differential between the US and Germany/Europe makes EUR/USD longs costly. At the same time, we also don’t see the euro as the perfect safe haven.

Sterling rebound slows ahead of article 50 triggering

On Monday, there were no important UK data. The BoE published a framework for the 2017 banking stress test that included a test against a big economic setback and a sharp depreciation of sterling. This scenario isn’t formally linked to the risks of Brexit, but the case is straight forward. The upcoming new phase in the Brexit saga (triggering article 50 on Wednesday) didn’t negatively impact sterling for now. USD weakness was the most important driver for sterling trading. Cable ‘enjoyed’ quite a powerful short squeeze. The pair traded temporary above 1.26, but closed the session at 1.2559. EUR/GBP initially declined, but finally closed the session in the mid 0.86 area.

Today, there are again no important eco data in the UK. So, global factors and investors looking forward to the formal triggering of Article 50 (tomorrow) will set the tone for sterling trading. With no high profile news on the agenda, some further consolidation on the recent sterling rebound might be on the cards. Two weeks ago, 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, (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. 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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