Sterling resilient despite rate cut speculation

KBC Market Research Desk KBC Bank

The post-payrolls USD correction bottomed yesterday. EUR/USD set a ST correction top at the onset of the US trading. However, solid US data blocked a further EUR/USD rebound. US retail sales, the Philly Fed business outlook and the jobless claims were all better than expected. The reaction to the data was guarded, but a cautious reversal of the recent slide in (US) yields also helped to put a floor for the dollar. EUR/USD dropped from the 1.1170 area to close at 1.1137. Higher yields and a persistent risk-on with US equites extending their record race pushed USD/JPY again north of the 110 barrier (close 110.16).

This morning, fourth quarter China growth was reported at 6.0% Y/Y, as expected. However, December retail sales, production and investment printed slightly stronger than expected, suggesting stronger growth further out. Asian equities show modest gains. China underperforms. The yuan extends gains (USD/CNY 6.87). USD/JPY is drifting further north (110.25 area). EUR/USD is holding near yesterday's close.
Later today, the eco calendar is moderately interesting, with the final EMU CPI. In the US housing data (starts and permits), production data and the University of Michigan consumer confidence will be published. Consumer confidence probably has most potential to move the dollar. However, the consensus expects a stabilisation, admittedly at a high level. The persistent, low volatility risk-rally currently also doesn't give much guidance for USD trading. In theory, it could be a USD negative. However, as the dollar still enjoins a higher yield compared to the likes of the euro, there is no big incentive for investors to leave USD long ‘carry trades' in a low volatility environment. From a technical point of view, EUR/USD last week dropped temporarily below 1.11, but 1.1066 support survived on soft payrolls. EUR/USD 1.1066 remains our first downside reference. A rebound above 1.1180 would call off the ST downside alert. Still, a ST break beyond 1.1250 looks far from easy.

Earlier this week, EUR/GBP tested the post-election top, as several BoE policy makers indicated a growing chance for a rate cut, maybe already end this month. However, sterling found its composure and even regained ground. Did the market ran to far? Today, UK retail sales are expected to rebound after a poor November report. The jury is still out, but in a daily perspective, it looks that sterling might be a more sensitive to a positive than to a negative surprise.

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KBC Market Research Desk

KBC Bank

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