USD fights an uphill battle

On Friday, overall dollar weakness continued to dominate FX trading. Uncertainty on the potential political fall-out of the investigations against president Trump and people close to him are weighing on the dollar. At the same time, the euro extended a by default rally. Draghi's comments on the ECB press conference can only be considered as soft, but he also didn't seem overly worried on the recent euro strength. EUR/USD closed the session at 1.1683 (from 1.1631). USD/JPY finished the week at 111.13 (from 111.61 on Thursday evening).

Today, attention goes to the business sentiment data (Markit) and to a meeting between OPEC and non-OPEC countries in Russia. The EMU business sentiment indicators showed an unexpected mixed picture (at high levels) in June. The manufacturing PMI still improved, but the services PMI declined. Given the additional euro strength, we see downside risks for the manufacturing sector in July, but maybe some rebound in services confidence, as domestic demand fundamentals remain strong. The EMU data probably won't be a game-changer for euro trading, unless they show a really big surprise. If data would be unexpectedly strong, they might reinforce euro positive momentum. The focus will be on the US side of the story. Political uncertainty is probably here to stay and won't help the dollar short-term. Markets will also look forward to the Fed policy decision on Wednesday. The Fed will confirm its intention to continue policy normalisation and might even give some concrete hints on the start of the reduction of the balance sheet. At the same, time they probably can't ignore the recent softening in inflation. There is already quite some negative news discounted for the dollar after the recent setback, but we see no trigger yet for a positive U-turn on the US dollar. For that to happen, the dollar needs some really positive news. Strong US eco data next week might bring some relief, but that's still far away. For now there is not good reason to try to catch the falling knife.

USD: technical picture worsens further

EUR/USD rebounded above the 1.1300/66 resistance at the end of June. The payrolls and other recent data were not good enough to trigger a sustained USD rebound. Finally EUR/USD broke beyond the 1.1489/1.15 resistance, paving the way to the LT-correction tops at 1.1616/1.1714. A break would end the long consolidation that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area is not easy to break. We don't preposition for a break, but the pressure is mounting. Return action below 1.13 would be a first indication of a loss in upside momentum.

The USD/JPY rally ran into resistance in May and the pair returned lower in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair above the 112.13 correction top, but follow-through gains remain modest. USD/JPY 114.37 resistance was tested, but the test was rejected. The pair is currently drifting lower in the brooder consolidation pattern between 114.50 on the topside and 108.83/13 on the downside. A test of the downside is of the range is becoming ever more likely?. This suggests a pause in the recent USD/JPY uptrend. We stay cautious on USD/JPY long positions despite the recent decent performance.

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