Trump measures to block USD comeback?

KBC Market Research Desk KBC Bank

On Friday, the focus of USD traders was on the US Q4 GDP. The report was slightly softer than expected. The dollar lost a few ticks, but the move is technically insignificant. EUR/USD closed the day at 1.0699 (from 1.0682). USD/JPY finished the day at 115.10 (from 114.53).

This morning, a lot of Asian markets are closed for the Lunar New Year. The immigration measures of US President Trump are modestly negative for global risk sentiment. The Trump-driven uncertainty weighs on the dollar and supports the yen. USD/JPY is trading in the 114.50/60 area. Japanese Dec retail data disappointed, but had limited impact on yen trading. EUR/USD is changing hands in the 1.0725 area, as markets await the impact of the Trump measures on European and US (equity) markets.

Today, the US data, PCE and pending Home sales, won't affect markets much. The former are already included in Friday's Q4 GDP report. The latter are no market mover. In EMU, German inflation is expected to have dropped sharply M/M, but Y/Y inflation is expected to jump to 2% from 1.7% Y/Y (energy base effect). If confirmed, the release might be politically sensitive and increase German resistance against the ECB's very accommodative policy. The EMU confidence data (source: EC) are expected broadly stable after a substantial improvement in previous months. Finally, we get the first EMU Q4 GDP figures of Spain and Belgium ahead of tomorrow's EMU Q4 GDP. Markets are expecting a 0.4% Q/Q and a 1.7% Y/Y increase (for EMU). We see risks on the upside. The EMU data might be slightly euro supportive, but the focus for FX trading will be on global issues. Investors will try to assess the impact of the US immigration measures on specific parts of the economy and on global markets sentiment. Of late, it mostly ignored potential negative side-effects the Trump policy. The jury is still out whether recent measure will derail the reflation trade. In a day-to-day perspective, investors might turn a bit more cautious on global risk and on the dollar. So, last week's USD bottoming out process might stop. Especially, EUR/USD 1.0775 resistance remains with reach and might come again under pressure. The downside of USD/JPY looks a bit better protected. Markets dislike being too yen long ahead of tomorrow's BOJ meeting.

Global context: EUR/USD touched a multi-year low (1.0341) early this month.
After the Trump rally, plenty of good USD news was discounted while US/EMU rate differentials narrowed (correction), causing a dollar correction. Longer-term, the absolute interest rate support should provide a USD floor, if US data remain good and as long as there are no profound doubts on Trump's pro-growth policy. The day-to-day USD momentum improving slightly at the end of last week, but the jury is still out whether this might be the start of a new upleg. A return above EUR/SD 1.0874 would question the USD positive outlook. On the downside, EUR/USD 1.0341 is the first key support. USD/JPY is trading well off the post-Trump highs (118.60/66). The rebound off the 112.57/53 reaction low was quite constructive. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is a tough support

Sterling rebound slows

On Friday, sterling trading entered calmer waters, as investors awaited the outcome of the meeting between UK PM May and US president Turmp. EUR/GBP gradually returned north of 0.85. Political comments suggest that the UK labour party won't be very aggressive in trying to amend the Brexit blil in order to reach a softer Brexit. This was slightly negative for sterling. The meeting between UK May and US president Trump developed in a constructive environment, but the direct impact on sterling was limited. Negotiations on a trade agreement might start in the near future. EUR/GBP closed the session at 0.8526 (from 0.8480). Cable finished the day at 1.2555 (from 1.2597). So, sterling softness prevailed.

Today, the UK calendar is uneventful. Cable hardly profits from USD weakness overnight and EUR/GBP is trading relatively strong in the 0.8535 area. So, it looks that sterling still trades with a soft bias at the start of the new week. The global context (slightly risk-off?) will set the tone for sterling trading. It might be a slightly negative for the UK currency. Markets will also look forward to Thursday's BoE meeting. Despite recent good eco data, the BoE probably will maintain a wait-and-see stance and give no indication on a rate hike. Longer term, we still look to sell sterling as long as there is no clear indication that the BoE prepares to tighten policy to fight rising inflation. The Brexit divorce remains a complicated process. Sterling momentum was strong of late, but eased a bit at the end of last week. EUR/GBP 0.8579 50% retracement and 62% retracement (0.8515) of the 0.8304/0.8854 rebound is broken. The correction low comes in at 0.8451 and should provide strong support. A break would be technical significant. We look for confirmation of last week's bottoming out process in EUR/GBP.

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KBC Market Research Desk

KBC Bank

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