KBC Market Research Desk
KBC Bank
On Wednesday, the USD showed again no consistent trading pattern.
However, at the end of the day the changes were limited. USD/JPY was under pressure due to global risk-off sentiment. A poor US markit services PMI sent the pair to the low 111 area. However a real test of the 110.98 low didn’t occur as investors feared BOJ action. Later, USD/JPY rebounded as did oil and equities. The trading pattern of the dollar against the euro was different. The euro underperformed even as sentiment was risk-off. The poor US markit services PMI was the turning point. The dollar declined and EUR/USD regained the 1.10 barrier to close the session at 1.1013 (from 1.1020). USD/JPY finished the session at 112.18 (from 112.10).
Asian markets show a mixed picture this morning. Most indices show modest gains with Japan outperforming. At the same time Chinese equities underperform showing substantial losses. Japanese equities are supported as the yen shows signs of topping about. USD/JPY trades currently in the 112.20 area. A BOJ official warned on the risks of negative interest rates. At the same time, there are headlines on the Japanese government considering additional fiscal stimulus. In theory, this isn’t bad for the yen. The PBOC fixed the yuan little changed. EUR/USD stabilises in the 1.1035 area after the recent decline.
The eco calendar heats up with final EMU CPI inflation data, EMU M3 money supply, the US jobless claims and durable goods orders. According to the preliminary estimate, euro zone HICP inflation picked up to 0.4% Y/Y. Core inflation rose unexpectedly, from 0.9% Y/Y to 1.0% Y/Y. The final reading is expected to confirm this outcome. EMU M3 money supply growth is expected stable at 4.7% Y/Y. The lending data are more important. We look out for signs of improvement after poor lending data in December. Another disappointing figure might be a slightly negative for the euro. The US durable goods orders are forecast to have rebounded by 2.7% M/M following a 5.0% M/M decline in December. Following poor data in November and December, we see risks for an upward surprise. Finally, US initial jobless claims are expected slightly higher from 262 000 to 270 000. The US eco data might be slightly USD supportive.
Of late the dollar showed a diffuse price pattern with USD/JPY suffering from risk-off sentiment. At the same time, the euro struggled to prevent further losses against the dollar. Yesterday’s rejected test of the 111 area might be a signal that USD/JPY is ripe for some short-term consolidation, if the risk-off trade turns less intensive. For EUR/USD the picture remains inconclusive. The euro recently didn’t profit from negative news and the technical picture of EUR/USD deteriorated. Will the dollar continue to profit (EUR/USD decline) if sentiment on risk improves again? Yesterday’s intraday price action suggests some short-term consolidation. However, the jury is still out.
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 still 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 the 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.
Sterling decline continues
On Wednesday, the ‘Brexit-repositioning’ of sterling continued. Cable declined another big figure and tumbled (temporarily?) below 1.39, the lowest level since March 2009. Risk-off sentiment and a further decline of oil added to the sterling negative sentiment. The UK loans for home purchases were much higher than expected, but didn’t help sterling much. CBI reported sales were marginally weaker than expected. Cable set an intraday low in the 1.3880 area around noon London time. EUR/GBP set a new short-term high north of 0.79. The decline of sterling finally ran into resistance during the US trading session.
Cable ‘rebounded’ to close the session at 1.3927 (from 1.4022). EUR/BGP held close to the highs as the euro rebound later in the session. The pair finished the day at 0.7909 (from 0.7859).
Today, the details of the UK Q4 GDP will be published. A confirmation of the 0.5% Q/Q 1.9% Y/Y preliminary reading is expected. A weak contribution for net exports might be a negative for sterling. However, the focus remains on the Brexit debate. Even positive data had no lasting impact on sterling of late.
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 remains negative. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. The pair yesterday cleared the 0.7898 resistance. 0.8066 is the next important resistance.
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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