Dollar trading mixed as risk sentiment deteriorates

On Tuesday, trading in the major currency cross rates showed a mixed picture. The dollar gained marginally further ground against a weak euro. EUR/USD tested the 1.10 barrier. A poor German IFO business climate weighed on the euro. At the same time, the dollar struggled to prevent further losses against the yen as sentiment on risk was (modestly) risk-off. The US consumer confidence was very weak, but only had a limited and temporary impact on the dollar. EUR/USD closed the session at 1.1020 (from 1.1030). USD/JPY finished the day at 111.78 (from 112.36).

The risk-off correction from the US continues in Asia. Oil is again a key factor for the deterioration in global investor sentiment. Comments from the oil ministers of Iran and Saudi Arabia illustrated that a deal to cut production is still very far away. Brent oil has dropped below $33 p/b. Asian equities mostly traded with moderate losses. China rebounds late in the session. The PBOC set the fixing of the yuan marginally weaker (0.04%) against the dollar. The on-shore and offshore yuan are both trading weaker. Overnight, BoJ’s Kuroda made some balanced comments. He said the BOJ has still plenty of room to cut interest rates further. However, the Bank would not push interest rates further into negative territory without considering the impact such a move could have on the economy and consumer prices. The comments had little impact on the yen. The Japanese currency records moderate additional gains due to the risk-off sentiment. USD/JPY trades in the 111.85 area. The dollar remains rather strong against the euro, holding in the 1.1010 area.

Today, the eco-calendar is rather thin. There are only second tier eco data in Europe. In the US; the mortgage applications, the Market services PMI and the New home sales will be published. US new home sales are forecast to have dropped by 4.4% M/M in January (to 520 000). Following very strong data in the previous month (10.8% M/M increase), we believe that the risks are for a more significant correction. After the sharp drop in the Markit manufacturing PMI, the services PMI might get a little more attention. Following two consecutive monthly declines, the consensus expects a marginal uptick from 53.2 to 53.5. Negative US data might fuel global uncertainty but, looking at the price action of the previous days, the impact on the dollar is not that evident. Negative global/US sentiment recently was negative for USD/JPY. However, the 110.98 correction low is coming on the radar. It is likely that the BOJ will come out to warn markets if the yen strengthens too fast. It is unlikely for the yen to weaken in a sustainable way as long as sentiment on risk remains negative, but the pace of the recent decline might slow. The euro recently didn’t profit from negative news and the technical picture of EUR/USD deteriorated. For now, there is no reason to row against the EUR/USD negative tide.

From a technical point of view, the correction high stands at 1.1376. Next important resistance kicks in at 1.1495. Recently, the dollar slowly fought back, but this move had no strong momentum. Monday’s decline below 1.1060 is a ST negative for EUR/USD and might open the way to the 1.0810/1.0711 support area, but confirmation is needed. USD/JPY dropped below the key 115.98 pre-BOJ low. Japanese officials warned on potential action, putting a short-term floor under the pair. Even so, it remains vulnerable and is nearing again USD/JPY ST lows at 110.99. Any rally might soon run into resistance (1.1487 recent high) The 115.98 January low is a next resistance.

Cable falling to 1.40

On Tuesday, there were no UK eco data but several BoE members including governor Carney testified to parliament. Individual members put their own accents (Vlieghe was soft). Carney reiterated he still thinks the next move will be a rate hike, but the Bank has room to support the economy if needed. He also acknowledged the sterling decline due to uncertainty on Brexit. The BoE will handle this issue as any other political event risk. Carney was very reluctant to negative interest rates. Sterling initially traded with a slight negative bias, but the decline accelerated later in the session as oil declined and sentiment on risk deteriorated. Cable set a new multi-year low and closed the session at 1.4022. EUR/GBP finished the day at 0.7859 (from 0.7795 on Monday).

Today, the BBA loans for Home purchases and the CBI distributive trades report will be published in the UK. For the loans, a modest rebound is expected after last month’s setback. For the distributive trades, a limited decline from 15 to 12 is expected. UK retail sales have been very volatile of late, but the underlying trend remains constructive. However, last week, sterling hardly reacted to very strong official retail sales data. We doubt that today’s data will be able to support sterling. The negative global context will probably remain the dominant factor. After the recent decline, quite some bad news should already be discounted for sterling. However, we see no trigger for a reversal especially as oil/the global context remain negative. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. First resistance stands at EUR/GBP 0.7898. A return below EUR/GBP 0.74 would be a first indication that sterling enters calmer waters.

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