Dollar extends decline

Yesterday, the USD sell-off continued, albeit at a slightly slower pace. There was little economic news. Investors continue to adapt positions away from the US currency as chances on another short term Fed rate hike crumbled. Soft talk from ECB’s Draghi didn’t cap the topside of EUR/USD. This time, there was no obvious one-on-one link between oil and the dollar. EUR/USD closed the session at 1.1209 (from 1.1105). USD/JPY dropped to close the session at 116.78, down from 117.90 on Wednesday.

This morning, most Asian equities trade little changed to slightly lower. Japan underperforms due the rebound of the yen. The PBOC again fixed the yuan stronger against a globally weakening dollar. The off-shore yuan preserves most of yesterday’s gains against the dollar. On Sunday, the PBOC publishes its foreign reserves data, which will give an indication of the PBOC interventions to support the yuan. The Aussie dollar drifts off the recent highs after disappointing Australian retail sales data. At AUD/USD 71.80, the Aussie dollar still preserves most of this week’s gains though. EUR/USD (1.12) trades little changed from yesterday’s close. USD/JPY (116.85) holds within reach of the recent lows.

Today, the focus for global currency trading will be on the US payrolls report.
Consensus expects US job growth to have slowed in January to 190 000, down from 292 000. For the payrolls, we see downward risks due to less favourable weather conditions and as volatility on financial markets might have weighed on sentiment. A poor US payrolls report would be a negative for the dollar.
However, after the recent decline in short-term US yields and after the recent sharp decline of the dollar, quite some bad news should already be discounted. Most expected Fed tightening for 2016 is no longer discounted.

We are keen to see the reaction of the dollar in case of a moderate undershoot of the payrolls. Will the USD set new lows against the euro and the yen or will there be signs of a short-term USD exhaustion move? A good payrolls report might trigger some profit taking on recent USD shorts. In this context, we keep a close eye at the technical charts.

EUR/USD now arrived at levels that could become interesting to reconsider EUR/USD shorts as we assume that the threat of more ECB easing should finally cap the topside in EUR/USD. That said, we first want a sign that there is no follow-through price action on the recent USD sell-off and that a USD bottoming out process starts building. We look out whether the post-payrolls price action provides such signal.

From a technical point of view, EUR/USD broke above the 1.1060/1.1124 resistance area (15 Dec top: 62% retracement). This is a negative for the dollar.
The short-term correction high stands at 1.1239. Next important resistance kicks in at 1.1495. The picture for USD/JPY improved temporarily as the pair rebounded above 120 after Friday’s BOJ policy decision. However, the gains evaporated very soon. The 115.98 pre-BOJ correction low is an important point of reverence. One can expect the BOJ to send warning signals in case of a break below this level. A technical rebound is possible after the recent sharp setback, but we stay very cautions on USD/JPY long exposure as global uncertainty persists.

EUR/GBP nears the recent top

Yesterday morning sterling trading was mainly driven by the swings in the dollar as investors counted down to the BoE’s policy announcement. Cable set a new correction top in the 1.4665 area. EUR/GBP initially held stable in the low 0.76 area. Sterling ceded ground in the last hour before the BoE decision. The BoE as expected left its policy unchanged. The vote was 9-0 as McCafferty joined the majority. The BoE cut its 2016 growth and inflation forecasts. It also cut the wage growth forecasts. The policy assessment and inflation report confirm that a BoE rate hike has been delayed ‘sine die’. At the press conference, BoE governor Carney mentioned downside risks, but also reiterated that the next BoE move is likely a rate hike. In volatile trading, sterling lost some further ground against the euro and the dollar. However, the losses were modest as a soft BoE approach was already largely discounted. EUR/GBP closed the session at 0.7683 (from 0.7604). Cable closed the day at 1.4589 (from 1.4603).

Today, there are no important eco data in the UK. So, sterling trading will be driven by the price swings in the major dollar cross rates as market look out for the US payrolls. Of late, the rebound of EUR/USD as also pushed ERU/GBP higher. If the payrolls are not that weak, the rise in EUR/GBP might slow and this might also cap the rebound. EUR/GBP 0.7756 is the first resistance (correction top). The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Next big resistance stands at 0.7875. A return below EUR/GBP 0.74 would be a first indication that sterling enters calmer waters.

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