USD well bid as equities and core bond yields rise

Dollar reversed intraday losses

Yesterday, the dollar lost temporary ground, particularly against the euro . The US currency profited slightly from a constructive sentiment on risk of late, but European equities fell prey to some mild (intraday) profit taking. This weighed (temporary) on the dollar, too. However, the dollar losses were reversed later in the session as US equities turned again positive and as core bond yields rose substantially. EUR/USD closed the session even marginally lower at 1.0725 (from 1.0736 on Tuesday).
USD/JPY ended the session at 119.91 (from 119.67).

USD well bid as equities and core bond yields rise

Asian equities are again in positive territory, but the gains are moderate. The HSBC China Manufacturing PMI declined further to 49.2 from 49.6. The market reaction is guarded. Is the stimulus story largely discounted? Even so, the ongoing constructive sentiment on risk and higher core bond yields keep the dollar well bid. EUR/USD is changing hands in the 1.0715 area. USD/JPY is trading in the 119.75 area.

Will the dollar get interest rate support?

Today, the advance EMU PMI’s will be published. In the US, we look out for the weekly jobless claims, the Markit Manufacturing PMI and the new home sales. The EMU PMI is the most interesting from a market point of view. A further improvement is expected. We are cautious on the manufacturing measure, but see upside risks for services. Such an outcome should be slightly supportive for the euro. The US data should only be of intraday importance. We also keep an eye at the bond markets. Over the previous two days, core bond yields trended higher, without changing the interest rate differentials though. This rise in core bond yields is only still tentative. Even so, we assume that a further rise in core bond yields will benefit the dollar. Greece might again move to the background after yesterday’s ECB decision to raise the amount of ELA funding for Greek banks, which was though no issue for currency trading.

Yesterday, we had a neutral bias for EUR/USD as we feared that a less positive sentiment on risk could slow the recent rally of the dollar. However, later in the session and this morning in Asia, sentiment on risk turned again positive. This is keeping the dollar well bid. A further rise in core bond yields (if it occurs) could support the dollar, too. Admittedly, EUR/USD recently was confined to a very tight range and this probably won’t change today. Even so, we are slight more positive on the dollar this morning than we were yesterday. Will USD/JPY test or even regain the 120 barrier?

The LT picture remains bullish for the USD, but the soft patch in the US is taking longer and some Fed governors see the economy having difficulties to get escape velocity. Therefore, they will wait for longer before tightening policy. This is dollar negative. Of course, on the side of the euro, QE will keep rates under downward pressure. At the same time, EMU eco data are improving. So, this brings the EUR/USD short term more in balance. Some dollar bulls may still have to reposition and therefore EUR/USD may revisit the 1.1098 area. We see the 1.0462-to 1.1098 range as appropriate short term.

EUR/GBP drops below 0.7150 mark on BoE Minutes

Yesterday, sterling rebounded as markets took some positive clues from the BoE minutes. In particular, the BoE remained constructive on growth, it saw some potential drivers for inflation going forward and indicated that market expectations on the Base Rate were exceptionally flat. Sterling jumped higher after the minutes. EUR/GBP closed the session at 0.7133 (from 0.7192). Cable regained the 1.50 mark and ended the day at 1.5037 from 1.4926.

UK retail sales to inspire further sterling gains?

Today, the UK eco calendar is interesting with the public finance data and the retail sales. Especially the retail sales (March figure) have market moving potential. A decent growth (0.4% M/M and 5.4% Y/Y) is expected (coming on the heels of a strong February figure). We think that the consensus is feasible. A figure in line with or above consensus might be slightly supportive for sterling. Of course, uncertainty on the elections remains an issue. So, the market reaction might bit more guarded than would otherwise be the case.
Of late EUR/GBP was locked in a sideways range in the 0.7150/0.7400 area. The negative impact of the election uncertainty on sterling eased of late. Yesterday, sterling even gained on positive BoE minutes. This pushed EUR/GBP below then 0.7150 support area. This break brings the reaction low 0.7014 again on the radar. A break looks difficult ahead of the elections.