KBC Market Research Desk
KBC Bank
Dollar decline remains moderate given poor US data
On Friday, global investor sentiment deteriorated again, but as often recently the negative impact on the dollar remained initially moderate. However, during the US trading session, the eco data, including the retail sales, were also weaker than expected. This put the dollar under additional pressure. EUR/USD traded temporary in the high 1.09 area, but the dollar regained part of the losses as the downward pressure on US equities eased after the opening. EUR/USD closed the session at 1.0916, from 1.0865 on Thursday. The losses in the USD/JPY were still more outspoken. The pair ended the session at 116.98, from 118.05.
Overnight, Asian equities trade mixed, mostly slightly lower. Chinese authorities took additional steps to support the yuan. The PBOC will impose reserve requirements ratios on yuan deposits held on the on-shore market by foreign financial institutions. The measure will de facto absorb liquidity and support the yuan. The PBOC fixed the yuan slightly stronger against the dollar this morning. ( 6.5790). The CNH rebounded to the USD/CNH 6.5830 area. Oil extends its decline with Brent trading close to $28 p/b. The Canadian dollar touched another multi-year low against the dollar. The impact on the Aussie and the Kiwi dollar is moderate. The major USD cross rates trade little changed from Friday’s close. EUR/USD is changing hands in the 1.09 area. USD/JPY trades in the 117 area. Liquidity is probably limited as US markets are closed today.
Today, there are no eco data in Europa while US markets are closed (Martin Luther king day). So, trading will develop in thin market conditions with oil the key driver of intraday trading.
Of late, the reaction in EUR/USD remained very limited compared to the big turmoil on other markets. On Friday, the pair jumped temporary higher as the US eco data disappointed and as interest rate differentials between Germany and the US declined substantially. However, at the end of the day, the moves were again limited and the pair remained within established ranges. We assume that this remarkable range trading pattern will continue today. USD/JPY remains more vulnerable to the global negative risk sentiment. However, with Asian equity markets doing not that bad given the decline in the US on Friday, we assume that trading in this cross will also be technical in nature.
From a technical point of view, EUR/USD failed to regain important resistances at 1.1087 (breakdown) and 1.1124 (62% retracement from the October high). Two weeks ago, EUR/USD failed to sustain below 1.0796 support (07 Dec low). Next support is at 1.0650 (76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.1004 (reaction top) is a first reference. This level was left intact even despite poor US eco data on Friday. Next resistance comes in at 1.1060/1.1124 (15 Dec top/62% retracement). We expect this resistance to be strong and difficult to break. The picture for USD/JPY remains negative below 120. Next support comes in at 116.18 (August low). The pair moved into oversold territory and now tries to put a bottom in place .
Sterling nosedives on global sentiment and oil
The post-BoE relief for sterling was very short-lived. A negative global risk sentiment and, in particular another downleg in the oil price, sent sterling a new tailspin. Later in the session, the US eco data weighed on sterling too. This was of course in the first place the case for EUR/GBP, but cable also broke below the recent lows as the US equity sell-off accelerated. The pair touched the lowest level since early 2009 and closed the session at 1.4258 (from 1.4413). EUR/GBP jumped close to the 0.77 big figure and ended the session at 0.7656.
Overnight, UK Right move house prices were decent at 0.5% M/M and 6.5% Y/Y. Sterling rebounds slightly this morning, but this is probably a correction on Friday’s sharp losses, rather than a reaction to the UK data.
Later today, there are no important eco data in the UK. Sterling currently tries to move away from Friday’s lows against the euro and the dollar as the setback on Friday was a bit overdone. However, with oil still under pressure, a sustained rebound of the UK currency looks far from evident. So, we expect a modest technical rebound at best.
In a longer term perspective, we keep the view that uncertainty on Brexit and global sentiment are important drivers for sterling weakness. As these issues won’t be solved anytime soon, we don’t see a trigger for a sustained sterling rebound. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Next resistance stands at 0.7715 . Sterling is in oversold territory against the euro and the dollar, but it is no good enough a reason to rush into sterling longs yet.
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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