Dollar declines going into the payrolls

On Thursday, the dollar rebound took a breather. USD/JPY struggled to sustain north of 114 even as US equities reversed early losses. EUR/USD also rebounded well north of 1.09. Investors took profit on EUR/USD shorts after a protracted decline recently and a failed test a of the 1.0810 support. The US ISM non-manufacturing was slightly better than expected, but didn’t really help the dollar. EUR/USD closed the session at 1.0957 (from 1.0868 on Wednesday). USD/JPY set again a slightly disappointing performance. The pair closed the session at 113.69 (from 113.48).

This morning, sentiment on risk remains cautiously positive in Asia. Commodities like oil and copper continue their gradually uptrend and supports regional sentiment. AUD/USD is near the key 0.7385 resistance area/range top. Markets also keep an eye at the at the National Party Meeting in China, looking for additional measures to stimulate the economy. The PBOC fixed the yuan substantially stronger this morning at 6.5248. There is also market talk on PBOC action as the off-shore yuan gains further ground. The dollar hardly profits from the risk-on sentiment in Asia. USD/JPY trades in the 113.85 area. EUR/USD is changing hands in the 1.0955 area.

Today, the focus for (global) currency trading will be on the US payrolls report. For February, a pick-up from 151 000 to 195 000 is expected, broadly in line with last year’s trend. Most recent US economic data were mixed, but labour market indicators remained strong. We also expect a rebound in payroll growth. Even a limited upward surprise is not excluded. The unemployment rate is expected to stay unchanged at 4.9%, after having dropped in January. Also wage data remain interesting. Average hourly earnings are forecast unchanged at 2.5% Y/Y, while a monthly increase by 0.2% M/M is expected.

Earlier this week, global markets’ fears on US growth eased. Initially this helped the dollar. However, yesterday the US currency fell prey to profit taking.
Investors apparently wanted a more neutral positioning going into the payrolls. Despite yesterday’s correction, we see potential for further USD gains in case of a good payrolls report as markets have still discounted very little Fed tightening further out this year. In this respect, wage growth and/or a further decline in the unemployment rate might be at least as important as the headline job growth. In case of a good US payrolls report it will be interesting to see whether the dollar is able to test (or even take out) key resistance against the yen (USD/JPY 114.87) and EUR/USD (1.0810/1.0778 area). A break beyond these levels would be a positive technical sign for the US currency.

Cable jumping sharply higher

Yesterday, sterling slightly lost ground early in European dealings. Earlier in the week, both the UK manufacturing and construction PMI missed market expectations, but had no lasting negative impact on sterling. Yesterday’s price pattern was a similar. The UK services PMI declined sharply from 55.6 to 52.7, while only a limited decline to 55.1 was expect. Sterling lost a few ticks against the euro and the dollar. EUR/GBP ‘jumped’ to the 0.7745 area and Cable dropped temporary to 1.4033. However, given the big negative surprise, sterling losses remained very limited. In the afternoon, EUR/USD gains spilled over to EUR/GBP and cable. EUR/GBP settled in a tight range close to, but mostly slightly below 0.7750. Cable even succeeded an impressive rebound on USD weakness.
EUR/GBP closed the session at 0.7728 (from 0.7719 on Wednesday). Cable jumped sharply higher and close the session at 1.4178 (from 1.4078).

Today, only UK car registrations are on the agenda. Yesterday’s price action of sterling was again constructive. The UK currency held strong despite poor UK eco data. This suggests a further unwinding of sterling Brexit shorts. Today, the focus will be on the dollar moves as the payrolls are on the agenda. However, we see room for further moderate sterling strength.

The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. The pair cleared the 0.7898 resistance last week. 0.8066 is the next important resistance. Short-term, EUR/GBP tested a first support at 0.7596 on Wednesday. A sustained break below this level would be a first indication that sterling sentiment improves.

•  Download Full Sunrise Market Commentary Currencies