Dollar decline slows

The ‘rollercoaster’ ride for EUR/USD continued yesterday. On Tuesday, the euro was hammered by poor regional data. On Wednesday, the dollar was hit by a similar set of disappointing price and activity data. Yesterday, the focus turned again to the euro. Widening intra-EMUU credit spreads pushed EUR/USD temporary below the 1.28 level. (Currency) trading was some kind of erratic in nature. The price pattern in USD/JPY is a bit more logical. The pair more or less follows the usual risk-on/risk-off pattern. Strong US eco data had only a very limited impact on USD trading.

Yesterday in the US, the storm in the equity markets calmed down. USD/JPY tries to build a bottom and is changing hands in the low 106 area this morning. EUR/USD settled in the 1.28 area. So far, the easing of tensions doesn’t help the dollar against the euro. Fed Bullard said yesterday that the Fed should consider delaying the end of asset purchases to stop a decline in inflation expectations. This soft Fed talk probably weighs on the dollar. Despite signs of stabilisation in the US yesterday evening, many Asian equity indices show losses. So, the jury is still out whether the risk-off trade is ending.

Today, several ECB members will speak, while in the US, the housing starts & permits and Michigan consumer confidence will be published. Housing data are notoriously volatile. For the Michigan confidence, we see downside risks to the consensus. Looking at the price action yesterday, there could be an asymmetrical risk. Strong data were ignored by the dollar. Poor data might still add to global nervousness and reduce interest rate support for the dollar. This applies in the first place for USD/JPY. For EUR/USD, the picture is a bit more mixed. Weakness in Europe is blamed as the major source of global uncertainty and tensions in the EMU bond markets might be a negative for the euro, too. That said, a big downside leap in EUR/USD is unlikely at this stage. There is still another wildcard left for USD-trading. Fed ‘s Yellen will speak on inequality in Boston. Will she feel the need to give markets some guidance in the current storm? As mentioned earlier this week, we continue to monitor short-term US yields. Will the dollar regain interest rate support when tensions ease? The 2-year US bond yield is off the lows, but at 0.33%, is still very low giving little support for the dollar. (It was almost 60 bps three weeks ago).For now, we expect more erratic, sideways trading in EUR/USD. For USD/JPY we are not convinced that a sold bottom is already in place.

From a technical point of view, USD/JPY came close to the 110.66 resistance, but the rally ran into resistance. The difference in monetary policy between the US and Japan should be supportive for USD/JPY longer term. However, short-term the pair is in correction modus. The reaction of USD/JPY (and of US bond yields) after the payrolls and after the Fed Minutes suggests that the topside in USD/JPY is difficult short-term. Risk-off sentiment is a short-term negative, too. We stay on the side-lines and wait for signs of a bottoming out.

The technical picture of EUR/USD deteriorated after the break below the key 1.2662 support level (Nov 2012 low). We have a LT negative bias on EUR/USD. The trend is intact, but the price action since the middle of last week suggests that the market was too long USD. It might take time for the pair to work through oversold conditions. The 1.2043/1.1877 support is the next LT target. The return above 1.2791 is an additional sign of short-term USD weakness. A re-break above 1.2995 would be really significant and suggest a real loss of momentum in the longstanding EUR/USD downtrend. This is not our preferred scenario, but in this high-volatile environment, caution is warranted.

EUR/GBP declines after rejected test of the topside

Yesterday, sterling trading was still driven by non-UK factors and technical considerations. Wednesday’s rejected test of the topside in EUR/GBP blocked the upside in this cross rate too. Peripheral spread widening was a negative for the euro across the board. EUR/GBP returned below the 0.80 mark. The 0.7750/0.8066 range continues to hold. Cable initially held a ‘tight range’ mostly in the upper half of the 1.59 big figure, but found a good bid later in the session. The pair even tested the 1.61 barrier overnight.

Today, there are again no important eco data on the calendar in the UK. So, more technical trading can be expected. Earlier this week, sentiment on sterling was fragile and lower than expected UK inflation weighed too. However, the rejected test of the EUR/GBP topside on Wednesday and yesterday’s follow-through price action suggests that sentiment on sterling has improved. The 0.7755/0.8066 consolidation range looks well in place. We look to sell into strength for return action lower in this range.