KBC Market Research Desk
KBC Bank
On Monday, dollar traded with a negative bias in Asia as sentiment on risk turned negative on harsh Brexit comments and negative comments from US president-elect Trump on Europa/Germany. However, European markets reacted calm tempering the negative impact on the dollar. USD/JPY finished the session at 114.20 (from 114.49). EUR/USD closed the session at 1.0601 (from 1.0643).
Overnight, Asian equities are trading mixed, mostly with a positive bias, outside Japanese equities which suffer from a stronger yen. The dollar remains in the defensive with USD/JPY taking the lead in the decline, as global political uncertainty (Brexit, recent Trump comments) are yen supportive. USD/JPY is changing hands in the mid 113 area, firmly extending its recent decline. The dollar is also losing ground against the euro (EUR/USD trades in the mid 1.0650 area). For now, the 1.0670/86 area remains intact.
Today, the German ZEW economic sentiment and the ECB lending survey will be published. The ZEW expectations were hit after Brexit, but fully recovered by December. For January, an increase to 18.4 from 13.8 is expected. The current situation index is expected slightly stronger at a high 65. The ECB bank lending survey will be scrutinized for improvement in lending conditions and demand.
The US calendar contains only the NY manufacturing survey. The headline index rose substantially in November and December. For January a stabilization at a high level is expected (8.5). Of course, The Brexit speech of UK PM Theresa May and the fall-out from the recent comments from US president-elect Donald Trump will also have a big impact on global/USD trading.
Asian markets are trading mixed, but price action in China and Japan suggests a risk-off sentiment in Europe and maybe also in the US. Until now, US and European equities held to post-Trump highs, but the Trump reflation trade is clearly losing momentum (dollar, bonds corrected). Negative political headlines (in the first place on Brexit) might cause profit taking the global reflation trade, weighting on the dollar. USD/JPY remains in the defensive as sentiment is turning risk-off. The reaction of EUR/USD is less evident. Brexit-uncertainty is also a potential euro negative. So, USD/JPY taking the lead in the USD decline. For EUR/USD, the picture remains fairly neutral.
Global context: EUR/USD touched a multi-year low (1.0341) two weeks ago. After the Trump rally, plenty of good USD news is discounted. For now, interest rate differentials between the dollar and the euro are narrowing (correction), causing a dollar correction. Longer-term, the absolute interest rate support should provide a USD floor if US data remain good and as there are no profound doubts on the ability of the US government to execute its pro-growth agenda. A buy the dollar on dips strategy remains preferred. EUR/USD 1.0670/85 resistance was tested last week, but no sustained break occurred. A return north of 1.0874 would question the USD positive momentum. On the downside, EUR/USD 1.0341 is the first key support. A test of parity remains possible MT. USD/JPY is trading well off post-Trump highs (118.60/66). A fist support (114.74/115.07) is broken, giving a short-term negative signal. We stay USD/JPY positive long-term, but are in no hurry to rush in. An equity correction or a further decline in core bond yields might be short-term negatives for USD/JPY. 111.16 marks the 38% retracement of the 99.02/118.66 rally .
Will speech of PM May cause further damage for sterling?
On Monday, sterling trading was dominated by today’s Brexit speech of UK PM May. Sterling tumbled in thin Asian markets. Cable filled bids below 1.20.
EUR/GBP set a new short-term top in the 0.8854 area. A calm reaction on the European markets to the Brexit-headlines eased sterling selling. EUR/GBP closed the session at 0.8799 (from 0.8694). Cable drifted sideways in the 1.21 big figure and finished the day at 1.2047.
Today, all eyes will be on the speech of UK PM and her Brexit strategy. If the press reports are right, the UK will give priority to regain control on immigration and UK law-making. Therese May will probably repeat that the UK will take a constructive approach to the negotiations. However, markets probably conclude that a clean Brexit might turn out to be a “hard” Brexit. The UK inflation data are also interesting. Headline inflation is expected to rise to a still modest 0.3% M/M and 1.4% Y/Y. An upward surprise is possible. In a speech yesterday, BoE’s Carney still kept a balanced/rather soft tone.
After the recent sell-off, quite some sterling negative news is discounted. Even so, we don’t preposition for a buy-the-rumour sell-the fact reaction. A global negative risk sentiment might be an additional negative for sterling. For now, we maintain our sterling negative bias. From a technical point of view, sterling regained a next ST-term resistance and is near the 0.8860 previous breakdown area.
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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