Dollar in the defensive as global sentiment deteriorates

On Wednesday, the focus for USD trading was on the fall‐out from the Fed decision and even more from the BOJ meeting. USD/JPY was hit hard by the BOJ’s decision not to ease policy further and by the risk‐off sentiment.
USD/JPY filled bids below 108. The impact on other major USD cross rates was more modest. EUR/USD gained slightly ground, but the pair remained within established ranges. US Q1 GDP was too close to expectations to affect markets. EUR/USD closed the session at 1.1352 (from 1.1322 on Wednesday). USD/JPY finished the day at 108.11 (from 111.46).

Overnight, Asian equities trade with modest losses or slight gains (China/ Australia). Commodities and especially oil remain well bid. The Aussie dollar rebounds after the post‐CPI decline. AUD/USD trades in the 0.7660 area.
Japanese markets are closed, but global risk‐off sentiment continues to support the yen. USD/JPY has dropped to the low 107 area. Yesterday, the impact of the decline in USD/JPY on USD/EUR was rather limited, but now the dollar is also under pressure against the euro . EUR/USD is testing the 1.1398 resistance.

Today, EMU Q1 growth is expected to have picked up at the start of the year. An acceleration in growth from 0.3% Q/Q to 0.4% Q/Q is expected. The first estimate of CPI inflation for April is expected stable at 0%. Yesterday’s data showed a slowdown in inflation in Germany, Spain and Belgium and therefore we see downside risks for the euro area measure. Finally, the EMU unemployment rate is expected to have stabilized at 10.3%. In the US, both personal income and spending are expected slightly higher at 0.3% M/M and 0.2% M/M respectively), but the PCE deflator is expected to have slowed to 0.8% Y/Y (1.5% for the core). The Chicago PMI might reverse some of its March uptick. Finally, Michigan consumer confidence is expected to increase from 89.7 to 90.2. We see downside risk for overall US data.

We see downside risk both for US and EMU data. In theory, this should be neutral for EUR/USD. However markets might give slightly more weight to the US data. European markets will open in risk‐off modus. This might be a negative for the dollar rather than for the euro. In the current environment, the high oil price might also be dollar negative. So, the odds are for a weaker dollar today. EUR/USD might drift higher in the 1.14 area. The key 1.1465/1.1495 resistance is coming on the radar, but we don’t expect a sustained break.

USD/JPY continues to struggle. The BOJ/MOF might sent warning signals, but we don’t row against the tide and are yen positive.

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 test of the 1.1234 support was also rejected, leaving the pair in erratic sideways trading. We see no trigger for a clear directional move in EUR/USD short‐term. A genuine economic improvement in the US is probably needed to inspire a USD rebound. This trigger isn’t available right now. The soft Fed approach and risk aversion pushed USD/JPY to a new correction low at 107.08 overnight, below the 107.63 support (April 11 low). The inaction of the BOJ helped the break occur. Verbal interventions to stop the rise of the yen are likely, but we doubt they will change the trend.

Sterling in consolidation modus

On Thursday, sterling trading was at the mercy of global market developments. Risk aversion was negative for sterling, but higher oil prices supported sterling.
Sterling didn’t really know which way to go. However, the UK currency held up rather well. Losses in the wake of Wednesday’s correction were very modest.
EUR/GBP gained a few ticks. The pair closed the session at 0.7773 (from 0.7786). Cable held close to the 1.46 barrier as the dollar traded weak across the board.

Overnight, the GFK consumer confidence was weaker than expected, but it didn’t hurt sterling. The UK currency is holding fairly strong against the euro and against a weak dollar. Later today, the money supply and lending data will be published. Lending is expect to hold at decent levels. A negative surprise might be slightly negative for sterling. However, we expect more consolidation, especially in EUR/GBP as the recent rebound as run its course. USD weakness might keep cable well supported. The pair is nearing the key 1.4668 resistance.

The technical picture of EUR/GBP improved 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 again. 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. Sterling had a nice rebound, but sterling sentiment will remain fragile as long as the referendum outcome isn’t clear.
More sterling gains might become difficult from current levels.

•  Download Full Sunrise Market Commentary Currencies