Dollar profits only slightly from risk-on rebound

On Tuesday, the dollar regained part of Monday’s losses as sentiment on risk turned more positive. The USD rebound was not impressive though. Later in the session, US consumer confidence declined sharply. Remarkably, US equities rebounded impressively later in the session. However, the risk‐on rally didn’t help the dollar as it didn’t get additional interest rate support. USD/JPY closed the session at 123.56 from 123.25 on Monday, while EUR/USD ended at 1.1060 vs 1.1088.

Overnight, Asian equities trade mixed.. EUR/USD is little changed in the 1.1050/60 area. USD/JPY is even drifting slightly lower, changing hands in the 123.40 area. Some commodity currencies try to rebound off the recent lows with the Kiwi dollar and the Canadian dollar taking the lead. The Aussie dollar is lagging. RBZN governor Wheeler in a speech said that some further monetary easing is likely to maintain the economy around its potential. However, further large rate cuts would only be consistent with the economy moving into recession. At the same time, he advocated a further depreciation of the kiwi dollar. For now, this doesn’t materialize.

Today, there are only second tiers eco data on the agenda that won’t be an issue for trading. The negotiations between Greece and its creditors apparently are no easy walk. However, at least for now, it is still no issue for (currency) markets. So, currency traders will keep an eye at the equity markets for guidance as they wait for the FOMC policy statement. Sentiment on risk might still be moderately constructive this morning. However, over the previous days the dollar didn’t get much additional interest rate support. Markets apparently expect the Fed to stay muted on a possible September rate hike (see Fixed income for details). In this context, we expect the Fed to keep its cards close to its chest. In a day‐to‐day perspective, such a ‘neutral’ Fed statement might be a slightly positive for equities and a slightly negative for the dollar. However, the reaction should be temporary and markets will soon look forward to the key eco data tomorrow (GDP) and next week. So, we have a cautious negative USD bias going into the Fed policy decision.

In a longer term perspective, EUR/USD still trades in the 1.08/1.1467 consolidation range. The bottom of this range was tested last week, but no break occurred. The global picture remains USD constructive (EUR/USD negative), but some consolidation after the recent EUR/USD decline is happening. We maintain a sell on upticks approach for return action lower in this range. EUR/USD 1.1224/78 is a first point of reference. The 1.1534 February correction top remains our line in the sand to maintain a USD positive bias MT term. On the downside, the 1.0819/09 area (27 May low/correction low) is the first high profile support. A sustained break below that level would open the door for a retest of the 1.0521/1.0458 area.

Sterling supported by good UK Q2 growth

Yesterday, the focus for sterling trading turned to UK Q2 GDP. UK growth was report in line with expectations at 0.7% Q/Q and 2.6% Y/Y. Still, the report confirms that the UK economy is well on track. Services/ domestic demand were again the key driver for growth. The figure is at least strong enough to keep the debate on a rate hike alive. Sterling regained some ground against the euro and the dollar after the publication of the report. Cable closed the session at 1.5613 from 1.5559. This was primarily due to GBP strength, but it also illustrates the restrained USD rebound. EUR/GBP closed the day at 0.7083, from 0.7127 on Tuesday.

Today, UK calendar contains the Money supply and lending data. The reaction of sterling to this report is mostly moderate. At noon, the CBI distributive trades will be published. A stabilisation at 29 is expected. The report might get some more attention after the unexpected decline in the June ONS retail sales. We don’t have a strong view on the outcome of the report, but another big negative surprise for the retail sector might weigh on sterling short‐term.

We had a sell‐on‐upticks approach for EUR/GBP to drift lower in the 0.7483/0.7014 range. Of late, we turned more cautious on sterling as EUR/GBP neared this range bottom. We kept the working hypothesis that high profile news is needed to push EUR/GBP sustainably below 0.70. The ongoing decline of EUR/USD pushed EUR/GBP (temporary?) below the 0.70 mark. We stay reluctant to jump on the sterling rally at the current levels and hope that the rebound goes a bit further to reinstall/add EUR/GBP shorts. The 0.7225/50 area is a first technically important resistance in this cross rate.