Sterling trades with a positive bias

Euro sell-off slows, at least temporary.

Market uncertainty on France eased yesterday. Still, core bond yields again lost a few more basis points even, as risk sentiment was not negative. The slide of core (US & European) yields weighed on the dollar. The USD decline accelerated, as US Treasury secretary Mnuchin said it would take time to implement tax reforms and to see their impact on growth. EUR/USD closed the session at 1.0582 (from 1.0558). USD/JPY finished the day at 112.61 (from 113.31).

Overnight, Asian equity markets trade with modest losses. The global reflation is losing some momentum after yesterday's comments of US Treasury secretary Mnuchin. The dollar is stabilizing just above yesterday's intraday lows. USD/JPY is trading in the 112.80 area. EUR/USD is changing hands in the 1.0580/85 area. Commodities are also in a soft spot with iron ore taking the lead in the correction. However, the correction in (some) commodities has little impact on the likes of the Aussie dollar. AUD/USD is holding in the 0.77 area, near the recent highs.

Today, the eco calendar is again uneventful. In the euro area, there are only second tier national releases. In the US, the January New home sales are expected to be up a 6.4% (571K) after a 10.4% (536K) decline in December. In general, housing is still doing fine. On a monthly basis we side with the market expectation of a rebound. Final Michigan consumer sentiment is expected to be marginally higher at 96 compared to the preliminary figure of 95.7. It remains near the highs of the post-recession era. We doubt that the US data will have a lasting impact on USD trading. Early this week, French election worries fuelled uncertainty on Europe and weighed on the euro. The political uncertainty on France eased after centrist Bayrou joined forces with Macron. EUR/USD rebounded yesterday and the rebound accelerated as the dollar suffered from soft comments of US treasury Secretary Mnuchin on the tax reform. We don't expect the EUR/USD rebound to go far. Even so, the day-to-day USD momentum is softening and this might persist ahead of Trumps appearance before Congress next Tuesday. As long as there is no clarity on the fiscal stimulus package, any further USD gains will have to come from strong US data. We maintain a cautious on the dollar in a daily perspective. Especially USD/JPY looks vulnerable.

Global context. The dollar corrected lower since the start of January as the Trump reflation trade slowed down. Two weeks ago, the dollar bottomed out, supported by Trump's tax promise. Underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and favour a sell EUR/USD on upticks approach. The downside test of USD/JPY was rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains a key support. The comments of Yellen before Congress (and of other Fed members) were USD supportive, but had little lasting impact on yields. We keep a USD positive bias longer term, but remain more cautious on the upside potential of USD/JPY compared to USD/EUR.

Sterling trades with a positive bias

Yesterday, sterling trading was order-driven and technical in nature. The UK currency regained some ground after a disappointing performance on Wednesday. EUR/GBP traded in the high 0.84 area in Asia after Wednesday's euro short squeeze, but drifted back to mid-0.84 area, despite the intraday rise of EUR/USD. The CBI retail sales data improved, slightly helping to maintain the sterling positive momentum. EUR/GBP closed the session at 0.8428 (from 0.8481). Cable jumped higher to close at 1.2556, supported by USD weakness.

Today, the UK eco calendar contains only the BBA loans for home purchases. A monthly decline is expected. Brexit might re-appear in the headlines, as markets look forward to the debate in the House of Lords early next week. EUR/GBP recently hovered in a tight range near the 0.8450 support. The BoE suggested that a rate hike is still not on the horizon, but for now it doesn't hurt sterling. Earlier this week, the (temporary) acceleration of the euro sell-off pushed EUR/GBP to the 0.84 area. Yesterday, EUR/GBP didn't profit from the EUR/USD rebound, suggesting some ST sterling resilience. Longer term, we have a sterling negative view, as the Brexit will negatively impact the UK economy. However, this is no issue at this stage. A sustained break below 0.8450 opens the way for a return to the EUR/GBP 0.8304 correction low, the next key support. We maintain a neutral bias on sterling short-term. Both EUR/GBP and cable show no clear trend.

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