EUR/USD stays in the defensive after Greek debt ‘deal'

On Monday, the single currency didn’t profit from the Greek debt deal. EUR/USD even reversed the late Friday rebound and returned to the low 1.13 area. Uncertainty on the approval of the Greek package of economic measures probably weighted. USD/JPY struggled to hold north of 119 as risky assets showed only moderate gains in the wake of Greek deal.

Overnight, most Asian equity markets extend the recent steady uptrend. There is not much high profile news. Investors assume that the Europe and Greece will finalise a new rescue package even as the bickering on Greek reform measures continues. USD/JPY hovers near the 119 pivot. EUR/USD is still going nowhere, trading in the 1.1335 area. A quarterly survey on behalf of the Rerserve Bank of New Zealand shows that business managers expect a further decline in annual and two-year inflation expectations. The Kiwi dollar declined from the 0.7530 area to the 0.7465 area.

Today, EMU final CPI will most likely be confirmed at -1.6% M/M and -0.6¨% Y/Y. There is a slight risk for a downward revision. The impact on the euro should be limited. The calendar in the US is interesting with the CS house prices, the Markit services PMI, the consumer confidence and the Richmond Fed index.
Especially the consumer confidence is interesting as data from the US consumer disappointed of late. However, the report will be published at the time when Fed’s Yellen starts the hearing before the Senate committee. The key question is whether she will give any hints on the timing of a first Fed rate hike. For an in depth analysis see the fixed income part of this report. Recently, the market positioning going in to the Yellen testimony was a bit diffuse. The rebound in US bond yields stalled as the minutes from January meeting were more dovish that expected. At the same time, the dollar stays reasonably bid. With the bond market positioned for a soft message from Yellen, it shouldn’t be too difficult for the dollar to preserve its recent gains even if Yellen keeps a balanced approach. Last but no least even Greece still plays a role as the creditors will assess the reform measures from the Tsipras government. This process might still cause some ripples, but we don’t expect an outright flaring up of the crisis.

To summarize. The Yellen testimony will be key for USD trading today. Bonds are apparently positioned for soft tone. The positioning in the currency market is more neutral. Given the positioning in the bond markets, we assume that downside in the dollar is well protected. At the same time, the underlying momentum of EUR/USD was also far from convincing of late, as it evolved in a very tight range.

From a technical point of view, 1.1534 (ST reaction high)/1.1679 (reaction top) remains our first topside reference. We still assume a sustained break will be difficult even asthe Greek debt drama moves to the background. On the downside, important support levels come in at 1.1262/24 and 1.1098 (correction low). For these levels to be broken short-term, a substantial rise in US bond yields is needed. Recently, US data showed a loss of momentum and were not strong enough to initiate a new up-leg of the dollar. The Fed minutes were soft, but the correction in US bond yields and in the dollar were limited. We maintain a EUR/USD sell-on-upticks approach longer term, but are in no hurry to jump in at the current levels. USD/JPY tried to regain the 120 barrier after the US payrolls, but the key 120.83/121.85 resistance stayed out of reach. The yen even regained ground on rumours of an internal debate within the BOJ on the efficacy of more easing. The pair holds well within the 115.57/121.85 trading range.. A sell-on-upticks approach within this range is slightly preferred.

Sterling still ignores weak UK retail data

On Monday, sterling trading showed a mixed picture. EUR/GBP declined steadily throughout the session. This was in the first place due to overall euro weakness. The single currency failed to profit from the Greek agreement reached on Friday. At the same time, sterling ignored another warning signal from the retail sector as the CBI reported sales were much weaker than expected. EUR/GBP even touched a new correction low. Cable was well bid too and filled offers in the 1.5475 area.

Today, there are no eco data on the calendar in the UK. However, BoE’s Carney and some other BoE governors will testify on the inflation report before the Parliament’s Treasury Committee. The BoE’s view on inflation/inflation report is already well documented after recent communication. Given recent mixed eco data, the market is positioned for a not-too-soft tone from the BoE. We have a long term positive view on sterling against the euro. However, after the recent rally of sterling, more downside in EUR/GBP will portably have to come from further euro weakness rather than further sterling strength.