GBP ‘euphoria' short-lived

Dollar fails to maintain positive momentum

Yesterday, the dollar was (slightly) in the defensive. EUR/USD dropped temporary to the 1.0765/70 area after a poor EMU PMI. However, the dollar came soon under pressure. EUR/USD started a nice intraday rebound and even regained the 1.08 mark. There was again no unambiguous explanation. Equity nervousness in Europe and softer core bond yields might have been a factor.
The rise in the oil price is also a usual suspect. On the euro side of the story, there were rumours on SNB euro buying. EUR/USD closed the session at 1.0824, compared to 1.0725 on Wednesday. The losses of the dollar against the yen were more moderate. The pair closed the day at 119.58 (from 119.91).

This morning, Asian equities don’t join the positive close in the US yesterday evening. Profit taking on recent strong gains is probably to blame. Rumours on a transaction tax in China might have played a role, too. The dollar struggles to rebound off yesterday’s dip. USD/JPY is trading in the mid 119 area. EUR/USD hovers around the 1.08 big figure.

IFo, durable orders and equities to guide USD trading

In Europe, the IFO business climate indicator will be published. After yesterday’s disappointing PMI, markets will be keen to see whether the setback is also visible in the IFO. Yesterday, the euro was only temporary affected by the poor PMI. The picture is unclear but we have the impression that the IFO will have to be very poor to push the euro really lower. Uncertainty, from whatever source, might weigh on core bond yields. Of late, this context was often more negative for the dollar than for the euro. In the US, the orders for durable goods are expected to rebound (0.6% M/M) after a poor figure in February. A rebound might be slightly positive for the dollar. However, investors will probably be cautious to draw conclusions from a monthly figure as orders are already very poor for quite a long time. Last but not least, the EMU finance ministers meet in Riga on Greece and German Chancellor Merkel also meets Greek PM Tsipras.
Over the previous days, several officials already indicated that no deal was expected at this meeting. Some positive comments are possible, but we don’t expect much for euro trading.

Yesterday, we had a cautious positive call on the dollar as we assumed core bond yields to maintain the recent rise and as equities didn’t look that bad.
However, both factors didn’t work and a rise in the oil also tempered USD enthusiasm. The reaction function of EUR/USD is currently far from clear. So we hold a neutral view going onto the weekend and ahead of the Fed. A (further) setback on the equity markets short term might be slightly more negative for the dollar than for the euro. We also continue to keep an eye on the oil price.

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.

GBP ‘euphoria’ short-lived

The pop-up in sterling sentiment after the positive BOE minutes on Wednesday was short-lived, as UK retail disappointed yesterday. EUR/GBP rebounded from the 0.7120 area to fill offers just below 0.72 late in European dealings. Admittedly, part of this move was also due to the intraday rebound in EUR/USD. Cable also dropped below the 1.50 mark after the publication of the retail sales, but regained this psychological barrier later in the session on broad USD weakness.

Today, the UK eco calendar is empty. So, technical considerations will prevail. We expect consolidation in the 0.72 area. Further EUR/USD gains might protect the downside in EUR/GBP, too.

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. On Wednesday, sterling broke temporary out of the established ST range on positive BoE minutes and dropped below the 0.7150 support area. However, the break was reversed very soon. We hold on to the view that further sustained sterling gains will be difficult ahead of the elections.