Dollar nearing key support levels

On Friday, the dollar stayed in the defensive driven by global risk-off sentiment. European data (strong GDP, lower than expected inflation) were ignored. US data surprised on the downside and added to the USD negative sentiment. EUR/USD trended higher in the 1.14 big figure and neared the key 1.1465/95 resistance. USD/JPY initially stabilized in the 107 area, as market feared BOJ action, but finally set a new correction low in the 106.15 area.

Overnight, several Asian markets including China are closed. Japanese equity markets decline 3.5% after being closed on Friday, as the strong yen bites.
Friday evening, the US Treasury published a FX monitoring list containing five countries (China, Korea, Taiwan Japan and Germany) with big current account surpluses. The Treasury considers the recent yen moves still as ‘orderly’ and said that Japan must comply with its commitments on exchange rate policies.
Japanese officials already replied that the US report won’t prevent them from acting in the currency market if needed, but it won’t be evident. USD/JPY is hovering in the 106.55 area, still within reach of the recent lows. The dollar also remains in the defensive against the euro with EUR/USD trading in the 1.1470 area. So, the test of the 1.1465/95 resistance has started.

According to the preliminary estimate, the euro zone manufacturing PMI dropped marginally from 51.6 to 51.5. The final reading is expected to confirm this outcome, but we see risks for an upward surprise. The US manufacturing ISM is expected to have weakened from 51.8 to 51.5 following a rebound last month. We see risks for a weaker outcome as regional confidence indicators reversed some of their March improvement. Central bankers are active too with ECB’s Draghi, Weidmann, Lautenschlaeger and Fed’s Lockhart and Williams scheduled to speak. We don’t expect the ECB governor to break new ground on policy. The ECB is for some time out of the picture as it wants to give previous measures the time to have their impact. However, the rise of EUR/USD to near key resistance could seduce them to some verbal intervention.

In a daily perspective, a poor US Manufacturing ISM could keep the dollar under pressure. On the other side of the EUR/USD equation, the ECB has not that much ammunition to counter a rise of the euro. Germany being on the monitoring list of the US Treasury is a slightly euro positive. So, a test of the 1.15 key resistance looks likely.

Technically, EUR/USD set a new 2016 high at 1.1465 helped by a dovish Fed. Key 1.1495 resistance remained intact. However, EUR/USD down moves were also blocked, leaving the pair near the recent highs. A genuine economic improvement in the US is needed to inspire a USD rebound. This trigger isn’t available right now. For now, we don’t anticipate a sustained USD decline as we expect US growth to be strong enough to allow to Fed to raise rates further later this year. However, with EUR/USD and the trade weighted dollar near key resistance/support, risks for additional USD losses are mounting. A sustained break of EUR/USD beyond 1.15 would be a serious warning signal and open the way for a retest of the key 1.1712 2015 high. The soft Fed approach, risk aversion and the Treasury report on currencies pushed USD/JPY to a new correction low at 106.14 on Friday. The inaction of the BOJ keeps the downside in USD/JPY fragile. Verbal interventions from Japan to stop the rise of the yen are likely, but we doubt they will change the trend.

Sterling comeback to slow?

On Friday, sterling was under pressure against the euro due to global risk-aversion. End of month EUR/GBP buying might also have been at work. The UK money supply and lending data were mixed. EUR/GBP maintained an upward bias in US dealings, in line with EUR/USD. The pair closed the session at 0.7837 (from 0.7773 on Thursday). Cable hovered sideways as the sterling correction and USD weakness counterbalanced each other. The key 1.4668 resistance was tested, but finally the pair closed the session little changed at 1.4612.

Today, UK markets are closed for a bank Holiday. So, sterling trading will develop in thin market conditions. It will probably follow global trends in the dollar and the euro. Markets will also keep an eye at the Brexit polls. Will uncertainty on Brexit come a bit more to the forefront after last week’s constructive, pro-remain momentum?

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.

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