KBC Market Research Desk
KBC Bank
On Monday, it looked that the dollar could fall prey to further profit talking as Asian markets started in risk-off modus. However, Europe didn’t join this trend, which prevented further USD losses. The manufacturing ISM was close to expectations at 50.1. Not a great figure at all, but a crimp was avoided. This was enough to keep the risk-on rally alive and it shielded the downside in the dollar. EUR/USD closed the session at 1.1016, little changed from 1.1006 on Friday. USD/JPY ended the day at 120.76 from 120.62 on Friday eve.
Overnight, Asian markets join the risk-on rally. Japanese equity markets are closed. The dollar is holding near yesterday’s closing levels against the euro and the yen. The Reserve Bank of Australia left its policy rate unchanged at 2%. The policy statement was hardly changed from the previous post meeting communiqué. Inflation is still expected to remain consistent with the target in the next one to two years. However, it is a little lower than earlier expected. The RBA considers leaving the policy rate unchanged at 2.0% as appropriate.
However, it keeps the door open for further easing if needed. The Australian dollar is said to be adjusting to the significant declines in key commodities. The Aussie dollar was already in an intraday uptrend in the run-up to the policy announcement and jumped to the AUD/USD 0.72 area upon the publication of the report. The tone of the report was apparently more balanced. Less soft than markets anticipated after the publication of soft Q3 CPI data.
Later today, the eco calendar is very thin. There are no important eco data in Europe. ECB president Draghi will give a speech after the close of the European markets. Will he keep the very dovish tone from the press conference or will he turn a bit more balanced? How much weight will he give to a potential further reduction of the deposit rate? If he downplays this option, it would be a temporary positive for the euro. In the US, the factory orders will be published. Bad news from the durable orders should already be incorporated. We don’t expected a lasting impact on USD trading. In a day-to day perspective, equities and the dollar hold remarkably strong. At some point a correction on the risk-on rally will occur and might trigger some moderate profit taking in the dollar, too. However, for now, there is no signal of such a change in sentiment yet. So, the working assumption is that the dollar can stay relatively strong going into the key US eco data later this week.
Over the previous two weeks; the market focus changed in favour of the dollar. At the ECB press conference, ECB Draghi surprised markets by suggesting that additional easing was forthcoming. This pushed EUR/USD below the key 1.1087/1.1105 support. Last week’s Fed policy statement ‘confirmed’ a policy divergence between the Fed and ECB, pushing EUR/USD further south in the LT consolidation pattern. 1.0819 is a first important support area. The targets of the multiple top with neckline in the 1.1087/1.1105 ara in the low 1.07 area. Some short-term consolidation on the recent USD rally is possible, but there is no reason to fight the euro negative/USD positive tide.
Sterling hardly profits from strong manufacturing PMI
Yesterday, the UK manufacturing PMI unexpectedly jumped from an upwardly revised 51.8 to 55.5. The figure came on the back of a series of disappointing data from the UK manufacturing/production sector. The initial reaction of sterling was understandably quite forceful. Cable jumped from the 1.5430 area to fill offers just below 1.55. EUR/GBP trended higher in early European dealings, but dropped to the 0.7110 area after the publication of the report.
However, growth in the UK is in the first place driven by services. This might be one of the reasons why sterling returned a big part of the initial gains. The text of a speech from UK Fin Min Osborn asking for legal safeguards from non-EMU members might have also been a negative for sterling. Cable closed the session at 1.5417 (from 1.5428 on Friday). EUR/GBP ended the day at 0.7145 (from 0.7133). So in the end, sterling didn’t profit from the strong PMI.
Today, the UK construction PMI will be published. A slight correction from a very high level (decline from 59.9 to 58.8) is expected. The report is usually only of second tier importance for sterling trading, expected in case of a really big surprise. That said, it is a bit disappointing that sterling didn’t maintain any gains from yesterday’s strong manufacturing PMI. Looking at the broader picture, the soft tone at the ECB press conference pushed EUR/GBP back lower in the longstanding sideways range. The pair tested the 0.7196 support, but the level was ‘really’ broken after the FOMC announcement. We maintain a sell-on-upticks approach for EUR/GBP. The BoE inflation report on Thursday is the next key reference from sterling trading.
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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