KBC Market Research Desk
KBC Bank
Dollar little affected by ‘soft’ Fed minutes
On Thursday there was initially no relevant news to guide USD trading. The dollar lost temporary ground early in Europe as the equity rally slowed. However, equities soon found their composure, putting a floor under the dollar. EUR/USD and USD/JPY returned soon to respectively the mid-1.1250 and the 120 area. Late in the session, the Fed published the minutes of the previous FOMC meeting. The Fed stayed optimistic on the US economy, but is worried about the impact of global conditions on the US economy. Several members were also worried that inflation would be dragged lower by oil prices and by the high value of the dollar. The reaction on markets was divergent. Equities rallied, confirming the soft stance of the Minutes. The dollar lost temporary ground but returned soon close to pre-minutes’ levels. EUR/USD closed the session at 1.1276, up from 1.1237. USD/JPY ended the day at 119.93 (from 120.01). So, the dollar traded marginally lower in a daily perspective.
Overnight, Asian equities join the post-Minutes’ rally yesterday evening in the US. As was mostly the case earlier this week, the impact on the likes of EUR/USD and USD/JPY is again limited. USD/JPY trades again very close to the 120 level; EUR/USD is changing hands in 1.1285 area. The rebound of global commodities continues to support the commodity currencies. The rouble, the Brazilian real, the Norwegian Krone, the Canadian dollar and the Aussie dollar all extend their comeback. AUD/USD nears the 0.73 big figure.
Today, the eco calendar is again thin in Europe and the US. There are only eco data from individual countries in Europe. In the US, the import prices and the wholesale inventories will be published. Usually, these data have hardly any impact on currency trading. Maybe low import prices could be partially because of the strong dollar. Even so, we don’t expect a big reaction of the USD to the data. So, global factors will once again set the tone for currency trading. Going into the start of the European session, the situation looks little different from what it was earlier this week. Risk sentiment remains constructive with both equities and commodities showing upside momentum. Until now, this context didn’t give a clear guidance for USD trading.
Both EUR/USD and USD/JPY are locked in tight ranges and we see no trigger to break this stalemate right now. The short term picture in the EUR/USD cross rate remains neutral. It looks difficult for the pair to break out of the 1.1087/1.1460 trading range. EUR/USD 1.1319 marks the post-payrolls high and is a first intermediate resistance.
In a long term perspective, EUR/USD and USD/JPY might see more range trading. A Fed rate hike will probably be delayed, but such a scenario also raises the chances for more ECB or BOJ easing. In this context, both EUR/USD and USD/JPY might hold the recent ranges. If the policy divergence between the Fed and the ECB becomes less obvious, EUR/USD may return toward the topside of this range.
Sterling little changed despite ‘soft’ BOE minutes
On Thursday, the dollar came temporary under pressure as global risk sentiment turned less positive. In this move EUR/GBP ‘jumped’ temporary to the 0.7380 area, but the UK currency regained strength going into the BoE policy decision and the publication of the Minutes. Cable touched an intraday top in the 1.5370 area. The BoE as expected kept its policy unchanged. The BoE remained rather optimistic on (domestic) growth, but the tone on inflation softened. The BoE now expects inflation to stay below 1% until the spring of 2016. Sterling came under modest pressure. EUR/GBP revisited the intraday highs in the 0.7380 area. The decline in cable was more pronounced as the pair dropped well below the 1.53 big figure. Later in the session, cable reversed course again. A slight decline in the dollar after the FOMC minutes pushed the pair back to the intraday highs. Remarkably, in this move cable this time outperformed EUR/USD, pushing EUR/GBP back lower. EUR/GBP closed the session at 0.7348 (from 0.7336).
Today, the UK August construction output and the trade balance data will be published. Markets will keep an eye at the trade data. A substantial improvement after a big deficit in July is expected. We doubt that the figure will be a big support for sterling.
From a technical point of view, EUR/GBP still trades in the upper part of the trading range (0.7423/0.7483). EUR/GBP 0.7423/43 was extensively tested, but no sustained break occurred. Trading north of 0.7483 would deteriorate the sterling short-term technical picture, which is not our preferred scenario. Even so, partial stop-loss protection on EUR/GBP shorts can still be considered.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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