USD still looking for clear guidance

Yesterday, eco data were mixed. The EMU PMI declined slightly, but the details weren’t that bad. EUR/USD rebounded temporary as shorts took some profit. US jobless claims were close to expectations and the Philly Fed index disappointed slightly. Even so, the dollar fought back later in the session and closed with only a marginal loss, both against the euro (EUR/USD 1.1112 vs 1.1094) and against the yen (121.04 vs 121.35). So, no big fundamental story and no big changes in the major USD cross rates.

This morning, the BOJ as expected left its policy unchanged. The BOJ was more optimistic on growth, as it saw better prospects for consumption and housing investment. The positive BOJ assessment was slightly supportive for the yen.
USD/JPY currently trades in the 120.80 area. The dollar is slightly weaker across the board as US interest rates ease a bit further. EUR/USD is changing hands in the mid 1.11 area. Sentiment on risk in Asia remains positive, with China still outperforming and Japan underperforming on relative yen strength.

USD CPI and CB speeches potential drivers for trading

Today, the IFO and the US CPI have market moving potential. German confidence indictors disappointed of late. The consensus expects a moderate decline from 108.6 to 108.3 but there are downside risks. Yesterday’s price action after the EMU PMI’s made clear that the reaction function of EUR/USD to EMU eco data might be quite ‘strange’ (the euro gained on a disappointing PMI). So, we don’t expect a clear directional move after the IFO. In the US, the headline (consensus -0.2% Y/Y) and the core CPI (consensus 1.7% Y/Y) are expected to decline. We see risks for an even lower figure. If so, it might be a negative for the dollar. Aside from the data, markets will keep close eye on speech from ECB’s Drahgi in Portugal this morning and from Fed Chairwomen Yellen after the close of European markets. Draghi will probably confirm the commitment of bond buying till September 2016. Will he elaborate on the Coeure comments earlier this week? The tone off the Draghi comments will be soft, but it is not sure that this will trigger additional euro losses. We don’t expect much from Yellen’s speech. She will probably reiterate that the Fed is in data depended modus. The Fed at the April meeting decided not to give any further forward guidance. Finally, there is still Greece. A meeting between Chancellor Merkel, President Hollande en Greek PM Tsipras apparently didn’t bring any progress. Even so, it doesn’t hurt the euro this morning. From an intraday perspective, the dollar is a bit in the defensive this morning. There are several issues that might change sentiment during the day, but a low US CPI might probably be imported and weigh on the dollar.

We maintain a cautiously positive bias on the dollar longer term. Earlier this week, the comments from ECB’s Coeure were euro negative, triggering a setback in EUR/USD, while some US data were USD supportive too. This helped the recent bottoming out process of the USD. Interest rate differentials moved in favour of the dollar. So, the short-term picture turned a bit more USD constructive. However, the jury is still out whether this process will continue. Of late, the (EMU) bond sell-off was an important driver for currency trading. The rise in core bond yields supported the euro more than the dollar. There are tentative signs that this pattern is changing. If the decline of the Bund stalls, the euro rally could peter out too. EUR/USD 1.1534 (early February top) is the next important resistance for EUR/USD. A sustained break beyond this level would be important and indicate further USD weakness. This is not our preferred scenario. However, a sustained further rebound of the dollar needs more confirmation that the US Q1 dip was indeed temporary. It might take time to clarify this issue.

Sterling extends gains on strong retail sales

Yesterday, sterling was supported by strong UK April retail sales. Especially cable performed very strong. The pair jumped from the mid 1.55 area to test the 1.57 barrier around UK noon. The gains of sterling against the euro were initially less pronounced, as the euro was also fairly strong, despite a slightly disappointing EMU PMI. EUR/GBP tested the 0.7117 support and dropped below the 0.71 mark as EUR/USD returned south early in the US trading. EUR/GBP closed the session at 0.7095 (from 0.7142). Cable ended the session at 1.5662, from 1.5536 at the close Wednesday.

Sterling rally to take a breather?

Today, the monthly UK budget data will be published. This is usually no currency mover. BoE’s Shafik and BoE’s Carney will speak today. We doubt that he will bring a different message from the BoE inflation report and/or the minutes.

Sterling was in good shape after the UK elections. The rally slowed temporary last week on a soft BoE inflation report, but the ‘correction’ was moderate.
Sterling even extended gains this week, even as expectations for a BoE rate hike are pushed back to 2016. The short-term momentum is obviously sterling constructive, but we think that enough good news is priced in at this stage. So, more consolidation in the 0.7014/0.7483 range might be on the cards. Within this range we maintain a sell-on upticks bias due to relative euro weakness.