USD decline slows, at least for now

The post New Year rebound of risky assets slowed on Friday and so did the decline of the dollar. The focus was on the US CPI, but inflation printed exactly as expected. Early in the session, the dollar didn’t go anywhere, but the US currency enjoyed a short squeeze during the US trading session. EUR/USD closed at 1.1469 (from 1.1500). USD/JPY also gained a few ticks and finished at 108.48. This morning, sentiment is spoiled by poor Chinese trade data. A simultaneous decline of both imports and exports is seen as confirming the impact of the trade war and as a sign of broader China economic weakness. Regional equities are turning south. The yen gains with USD/JPY drifting back to the low 108 area (even as Japan is closed for a holiday). The negative headlines on China are also weighing on the Aussie dollar. AUD/USD returned below the 0.72 handle. For now, the risk-off doesn’t support broader USD gains. The trade-weighted dollar (DXY) stabilizes in the mid 95 area. EUR/USD is trading near 1.1475.

EMU Nov production data are expected weak (-2.1 y/y) today, but the report is a bit outdated. In the US, the publication of several data will be delayed due to the government shutdown. The first corporate results (Citi-group) are a wildcard and so is Brexit. Since the start of the year, the dollar lost momentum as the Fed indicated a more cautious approach on further interest rate hikes. EUR/USD cleared the 1.15 resistance. Friday’s setback is a bit disappointing for USD-bears. However, we don’t expect the USD rebound to go really far unless risk sentiment would deteriorate sharply. Some ST EUR/USD consolidation might occur. MT EUR/USD 1.1621 (mid-Oct top) remains the next reference.

Sterling rebounded quite sharply on Friday, especially against a weaker euro (EUR/USD). The move was mainly technical in nature, but rumours that the UK government was considering to delay the exit beyond 29 March may also cause a repositioning out of sterling shorts. Today, UK PM May will try a last attempt to convince her party to support hear deal. However, the market focus remains on the ‘What’s next question’. The market is inclined to believe that a rejection of the deal might lead to a softer Brexit and be GBP-supportive. We think it’s too early to join this kind of sterling optimism.

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