Dollar holds near recent lows

On Friday, the dollar entered calmer waters after being in the defensive for most of last week. EUR/USD stabilised in the upper half of 1.13 in the wake of Thursday’s soft ECB talk. However, a real decline of the euro didn’t occur. The pair even rebounded later to close the day at 1.1399 (1.1378 on Thursday). An intraday rebound of USD/JPY also couldn’t be maintained. The pair rebounded as risk sentiment improved and as (Brent) oil rebounded well north of $41/barrel. However, the pair also reversed the earlier gains as did US equities. USD/JPY finished the day at 108.07 (from 108.21).

Overnight, Asian equities trade mixed with China outperforming and Japan underperforming. Chinese CPI inflation stabilized at 2.3% Y/Y in March. PPI deflation eased from -4.9% to -4.3%. This easing in price declines supports Chinese equities. Brent oil regains the $42 p/b level which is also positive. The rebound of oil this time doesn’t help the likes of the Aussie dollar. AUD/USD stabilizes in the mid 0.75 area. The dollar remains also in the defensive, especially against the yen. A Japanese official tried to ‘correct’ PM Abe’s comments in the WSJ last week that arbitrary interventions should be avoided. He said that Japan still can intervene in the currency market on one-side currency moves. For now, it doesn’t stop the rise of the yen. USD/JPY tested the correction low in the 107.65 area and trades currently around 107.85. EUR/USD trades in the 1.1410 area, marginally higher from Friday’s close.

Today, the eco calendar in Europe and in the US is almost empty. Alcoa will kick off the Q1 earnings season and Fed’s Dudley and Kaplan are scheduled to speak. So, global risk sentiment and oil will probably be the main drivers for intraday currency trading. Index futures suggest a slightly negative open in Europe and the US. The rise of the oil also doesn’t give a clear guidance for USD trading. If anything, it looks a slightly negative for the US dollar. The soft ECB talk last week capped the rally of the euro, but a real correction didn’t occur. The correction top and the EUR/USD 1.1495 resistance stay within reach. So, more technical trading can be expected as global markets await more concrete eco data. For now there is no short-term trigger for a sustained USD rebound. USD/JPY still struggles to prevent further losses. For this cross rate, traders will look for official’s comments ahead of the G20 meeting at the end of this week.

After the March ECB and FOMC meetings, the dollar was sold. Subsequently, the EUR/USD 1.1376 resistance was broken after soft comments from Yellen. EUR/USD set an new reaction top/2016 high at 1.1454. The 1.1495 resistance is important medium term, but is left intact for now. We see no trigger for a clear directional move in EUR/USD short-term. Medium term, the dollar probably needs really good news from the US to regain substantial ground.
The soft Fed approach and the risk-off sentimentpushed USD/JPY below the 110.99/114.87 range. The pair set a new correction low below 108 and this level was tested this morning. It is difficult for USD/JPY to regain ground in a sustainable way as long as risk sentiment remains fragile. We look out whether official talk on more BOJ easing or some kind of verbal interventions can slow/stop the rebound of the yen. USD/JPY has moved into oversold territory. So, there is room for a technical rebound/consolidation.

Sterling decline slows

On Friday, EUR/GBP entered also calmer waters after steep losses earlier last week. The UK currency even largely ignored a set of poor UK eco data. UK manufacturing production dropped 1.1% M/M to be down 1.8% compared to the same month last year (only -0.2% M/M and -0.7% Y/Y was expected). At the same time, the UK trade deficit was much wider than expected. Sterling lost temporary ground against the euro and the dollar immediately after the publication of the data, but recouped most of the losses later in the session.
EUR/GBP closed the session at 0.8067 (from 0.8094). Cable finished the day at 1.4128 (from 1.4056). Part of this rebound was still due to USD weakness.

Today, the eco calendar in the UK is also empty. The UK CPI data will be published tomorrow. The BoE holds a policy meeting and publishes the minutes on Thursday. Price data are expected slightly higher from the previous month, but the BoE will probably maintain a wait-and-see approach ahead of the June 23 EU referendum. Even so, the recent decline of sterling might slightly change the assessment on the short-term UK inflation outlook. In a day-to-day perspective, the decline of sterling apparently slows. However, with uncertainty on Brexit still omnipresent, a protracted rebound of sterling is unlikely.

The technical picture of EUR/GBP improved further as the pair broke above resistance at 0.7929/31 and at 0.8066. The recent sterling decline has been fast, which heightens the chances for a (temporary) pause. Even so, we don’t try to catch a falling knife and remain cautious on sterling longs.

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