US dollar stays in the defensive

KBC Market Research Desk KBC Bank

The easing of geopolitical tensions had an uneven impact on markets. Core yields initially rose a few basis points. Equities traded mixed with the US outperforming. US retail sales were close to expectations, being not strong enough to support the dollar. At the same time, US president Trump accused Russia and China to play a ‘currency devaluation game’. The Trump headlines weighed on the dollar, giving the impression that the US likes a weaker dollar. EUR/USD jumped to just below 1.24 and closed at 1.2380. USD/JPY finished at 107.12, near the intraday lows, despite a decent US equity performance and (slightly) higher US yields.

Overnight, Chinese Q1 GDP printed close to expectations (6.8% Y/Y). Retail sales were good. Industrial production disappointed slightly. The data didn’t prevent a further underperformance of Chinese equities. The dollar remains in the defensive (USD/JPY near 107, EUR/USD 1.2385). The Aussie dollar dropped from 0.7790 to the 0.7765 area as the RBA in the Minutes saw no reason for an interest rate hike in the near future.

Today, German ZEW investor sentiment is expected to ease further, confirming the easing in other EMU sentiment indicators. This might be a slightly negative for the euro. US housing data are expected to recover modestly. March production is expected soft (0.3% M/M). However, the focus in US dealings will be on Fed speeches, especially of Fed Williams and on corporate earnings. Williams will probably keep the door open for a total of four rate hikes this year. Of late the dollar showed an inconvincing picture. USD/EUR and USD/JPY held slightly above recent/ cycle lows, but didn’t profit from potentially USD supportive news, including higher US yields/interest rate differentials. This pattern might continue today. Fed speakers remain a wildcard. However, there is little reason to expect the dollar to start a real upleg. EUR/USD is perfectly holding in the 1.2155/1.2550 consolidation pattern.

Yesterday, sterling preserved last week’s gains, also against a rather strong euro. The EUR/GBP 0.8650 support remained under intense pressure. Today, the UK labour market data will be published. Average weekly earnings are expected to rise to 3.0%. Positive real wage growth might support the case for more than one BoE rate hike this year. In a longer term perspective, we assume that enough good news on Brexit is discounted for now. However, good eco data and the prospect of further BoE rate hikes might keep sterling supported short-term. 0.8541 is the next intermediate support. 0.8305 is key.

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KBC Market Research Desk

KBC Bank

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