KBC Market Research Desk
KBC Bank
On Tuesday, the dollar extended Monday’s correction as investors turned cautious on the dollar ahead of today’s Fed decision. During the day, dollar selling intensified temporary as US durable orders and consumer confidence were weak, confirming the expectation for very limited US growth in Q1. EUR/USD jumped north of 1.13, but closed the session at 1.1297 (from 1.1268 on Monday). The loss in USD/JPY remained modest. The pair closed the session even slightly higher at 111.31 (from 111.20) as investors were reluctant to become yen long ahead of the BOJ policy decision tomorrow.
Overnight, US equity futures, especially the Nasdaq, are hammered by disappointing results from Apple and Twitter. However, the negative fall‐out on Asian markets is modest. USD/JPY (around 111) is holding up fairly well ahead of the BOJ policy decision, which probably limits the loss on Japanese/Asian markets. The Australian Q1 CPI was reported much lower than expected. Headline CPI declined 0.2 Q.Q to be up 1.3% Y/Y (1.7% was expected). The report raised speculation on an additional RBA rate cut an sent the Aussie dollar lower (0.7665 area). EUR/USD (around 1.13) remains immune for market moves.
Today, the focus will be on the FOMC meeting. For an in depth analysis see our KBC flash report. In the euro area, only M3 money supply and credit growth data will be released, while also the UK Q1 GDP data will be interesting . In March, growth in euro zone M3 is expected to have stabilized, but lending will gets most attention. Lending to households accelerated last month led by lending for house purchases, but lending to non‐financials remained quite slow. We expect this trend to continue in March, but in the coming quarters it will be interesting to see whether the latest ECB’s measures will boost lending further. Even in case of positive data the impact on the euro will be limited. Despite mediocre US eco data of late, the Fed might sound a bit more balanced as risks from the global economy and financial market volatility declined. If so, the outcome might be slightly supportive for the dollar. However, we don’t expect a profound change in the Fed’s assessment. Ahead of the Fed meeting, risk sentiment might be slightly negative, but oil holds near the recent highs. So more technical trading in USD/JPY and in EUR/USD might be in store.
Technically, EUR/USD set a new 2016 high at 1.1465 helped by a dovish Fed. Key 1.1495 resistance remained intact. Last week’s price action suggests that the topside of EUR/USD is still reasonably well. However, Friday’s move that pushed the pair below 1.1234 is rejected, at least for now. We see no trigger for a clear directional move in EUR/USD short‐term, unless the FOMC (Wednesday) becomes more hawkish and/or US eco data show a genuine economic improvement. The soft Fed approach and risk aversion pushed USD/JPY to a new correction low at 107.63 (April 11). Rumours that the BOJ will ease policy further on Thursday weakened the yen substantially, driving USD/JPY back to 111.91 and breaking first (minor) resistance at 110.67/99. For USD/JPY, the technical picture only becomes bullish if the pair breaks sustainably above 113.80 (March 29 high).
Sterling extends gradual rebound
On Tuesday, sterling extended its rebound. Investors adapted positions further as the anti‐Brexit campaign is gaining traction. Cable and EUR/USD both moved higher on dollar weakness. Cable broke above the 1.4520 resistance, accelerating the sterling buying momentum. In this move, cable again outperformed EUR/USD. EUR/GBP closed the session at 0.7749 (from 0.7780). Cable finished the day at 1.4582 (from 1.4482).
Today, the focus is on the UK Q1 GDP report. Growth of 0.4% Q/Q and 2.0% Y/Y is expected. There are some risks for a negative surprise. The CBI distributive trades are expected to rebound from 7 to 13. However, retail sales also disappointed of late. It will be interesting to see whether disappointing eco data will slow the anti‐Brexit GBP rebound. The day‐to‐day sterling momentum remains constructive. Even so, we still look for signs that the sharp counter move on the GBP Brexit decline has run its course, at least short term. Also keep an eye on cable (in the wake of the Fed decision). A sustained break north of 1.4668 would improve the technical picture for cable.
The technical picture of EUR/GBP improved further as the pair broke above the mid 0.79 area. A counter move occurred over the previous two weeks and threatens to deteriorate the picture. The drop below 0.7830 was s a first warning. A move below 0.7684 (38% retracement/previous lows) would make the technical picture again neutral. The day‐to‐day momentum for sterling improved, but sterling sentiment will remain fragile as long as the referendum outcome isn’t clear. So, the polls in the next weeks may be decisive.
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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