USD weakness prevailed yesterday, driven by a sharp USD/JPY decline. The pair dropped from the 108.75 area to fill bids below 107.50 before European noon. The USD/JPY decline weighed also on other USD cross rates. EUR/USD trended higher in the 1.23 figure. We didn’t see a clear trigger for this yen-driven repositioning, but it created uncertainty on European equity markets. The USD decline slowed after a strong US NFIB confidence and ‘hawkish’ comments from Fed’s Mester (no impact yet from recent turmoil), but USD sentiment remained weak. EUR/USD closed at 1.2352. USD/JPY finished at 107.82.
Overnight, most Asian equities indices are in positive territory in line with WS. Several markets are heading for a holiday period (Lunar New Year) starting tomorrow. Japan underperforms as the rise of the yen continues. USD/JPY dropped below the 107.32 support, reaching the lowest level since November 2016. Japan Q1 GDP was soft (0.5% Q/Qa), but domestic spending OK. For now, there are few comments from Japanese officials on the rise of the yen. The USD/JPY slide still weighs on other USD cross rates. EUR/USD trades in the 1.2375 area. EUR/JPY is nearing the key 132/131 support area.
Today, Q1 GDP releases in Germany, Italy and EMU are interesting, but the focus for global trading will be on the US CPI, and to a lesser extent US retail sales. Headline CPI is expected to ease from 2.1% Y/Y to 1.9% (core from 1.8% to 1.7%). The dollar probably needs above consensus inflation to change fortunes for the better. We also keep an eye at the strange combination of yen-strength and at the same time relative equity resilience (in Asia ex-Japan and in the US). How long will this pattern persist? Technically, EUR/USD consolidates between 1.2165 and 1.2537. The pair dropped below 1.2323/35 support but follow-through price action was modest. Next support at 1.2165 looks far away for now. We assume that current USD weakness won’t push EUR/USD beyond the 1.2537 top yet.
UK CPI printed slightly above consensus yesterday (headline 3.0%), but didn’t help sterling. The report won’t change the BoE’s rate hike path. After a brief dip, EUR/GBP returned to the 0.89 area. Today, there are no UK eco data. EUR/GBP is trending higher in the 0.8690/0.9033 range, with intermediate resistance at 0.8930. We hold our view that the 0.8690 support won’t be easy to break without big progress on Brexit.
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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