KBC Market Research Desk
KBC Bank
On Thursday, the USD held near the recent highs, but without a clear directional trend. In technical trade EUR/USD dropped temporary below 1.0860. USD/JPY traded temporary north of the 104.64 top. However, the gains could not be sustained. The dollar fell prey to profit taking. An intraday decline in core bond yields and US equities were an excuse the take some USD profits. USD/JPY closed the session at 104.22 (from 104.18). EUR/USD finished the session at 1.0889 (from 1.0887).
Overnight, most Asian equity indices trade with modest to moderate losses, joining the correction at WS. The trade-weighted dollar (DXY 98.77) still trades within reach of the recent highs, but yesterday's price action paints a doji-like pattern (trend reversal?) on the chart. USD/JPY holds well north of 104 (currently 104.35). EUR/USD trades in well-known territory in the 1.0885 area. Overnight, oil and some other commodities are in the defensive. Even so the Aussie dollar rebounds after higher than expected (headline) Q3 inflation. The report suggests that the bottom in inflation might have been reached and that the further rate cuts might not be needed. AUD/USD trades just below 0.77, within reach of the recent top.
Today, there are only second tier eco data in Europe. In the US, the Sep Goods trade balance, the Oct. Markit Services PMI, the Sep wholesale inventories (Sep) and the Sep New Home sales wil be published. The market expects a small widening of the trade deficit and a minimal increase in the wholesale inventories, which might cancel each other out GDP-wise. September New Home sales are expected to have dceclined 1.5%, following an already steep 7.6% decline in Austust. However July and the months before were strong.
Following a strong manufacturing PMI (Markit) a slight 0.2-point increase in the services PMI (52.5) is expected. Today's US data won't derail market expectations for a December Fed rate hike. Question is wehther they will be able to sustain the recent gradual rise in US boind yields and of the dollar. Over the previous two days, the dollar held close to the recent highs, but more gains were not registered. December Fed rate hike expecations put a solid floor under the US dollar. However, a pause/modest USD corrrection is possible especially if the rise in core bonds slows or in case of a risk-off correction.
So, in a day-to-day perspective, we turn a bit more neutral on the USD, even as the MT trend remains USD-positive. Apparently, there is some additional USD positive news needed to push the dollar beyond the recent highs against the euro and the yen.
From a technical point of view, EUR/USD finally dropped below 1.0952/13 support. The break is an extra USD positive and opens the way to next intermediate support (1.0822/1.0711). USD/JPY struggles to break north of 104.32/64. A break would paint a double bottom formation on the charts with targets in the 108/109 area. We stay cautious on sustained USD/JPY gains beyond the 104.32/65 resistance especially as global volatility/uncertainty intensifies. A new test of the recent highs looks to be in store.
Sterling: nervousness persists
On Tuesday, in the run-up to the US trading session, the UK currency fell prey to another selling wave. UK Chancellor Hammond kept the door open for further QE if the BoE would ask for it. Since the appointment of PM May, markets turned wary over potential political involvement in the BoE's policy. After Hammond's comments, UK foreign secretary Johnson said that he doesn't expect a new Heathrow runway to be built, contradicting earlier messages from the Transport minister that the UK government backs the project. It could open the first big rift in the UK's immature Cabinet. Sterling was hammered. EUR/GBP spiked to the high 0.89 area. In a hearing, before the House of Lords, BoE's Carney indicated that the recent decline of sterling and potential inflation risks might become more important in the BoE assessment. This helped to put an intraday floor for sterling. EUR/GBP closed the session at 0.8934 (from 0.8892). Cable finished the day at 1.2188 (from 1.2238).
Today, the UK calendar is unattractive. Markets will ponder the impact of yesterday's comments of BoE ‘s Carney. They make further BoE easing less likely short-term. At the same time, political uncertainty remains a source of sterling volatility. Over the previous days, the decline of sterling slowed. Some further consolidation or even a slight further rebound might be on the cards short-term. However, we don't expect this sterling rebound to go far and look to sell sterling on more pronounced up-ticks. EUR/GBP 0.8725 remains a key reference.
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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