Will better PMI’s support EUR/USD further?

FX markets weighed the consequences of Wednesday’s Fed communication yesterday. The dollar won’t receive Fed interest rate support in the foreseeable future, but that is also the case for the euro. The picture for USD (EUR/USD) trading was a bit puzzling. The US currency gradually fought back on Wednesday’s sell-off. This rebound occurred even as US yields remained well below the pre-Fed levels. At the same time, US equities rebounded which is usually also no USD supportive. US data were mixed, at best. Still, at some point, EUR/USD completely erased the post-Fed rebound. The pair closed at 1.1374 (1.1413 Wednesday). The intraday rebound of the dollar against the yen was more modest. The pair closed at 110.82 (from 110.70).

This morning, Asian markets show a mixed picture. Japan inflation (0.2% Y/Y headline, 0.4% ex fresh food) is drifting ever further away from the BoJ inflation target. The Japan 10-j yield (-0.07%) is touching the lowest levels since end 2016. Still, the impact on the yen is limited (USD/.JPY 110.75 area). EUR/USD also stabilizes in the 1.1380 area.

Today’s EMU PMI’s are interesting. Markets will look out for signs of improvement, confirming the hypothesis that the slowdown at the end of 2018/early this year might be temporary. A single positive surprise won’t change expectations on the ECB interest rate trajectory. Still, a surprise in either direction might guide the intraday euro sentiment. We see a slightly higher chance for positive surprise. If so, it might help EUR/USD to return north of 1.14, but we don’t expect a breach of important technical levels.

This week’s soft Fed communication evidently was USD negative and helps to put a floor for EUR/USD. That said, in a broader perspective, the Fed and the ECB are now a similar soft, wait-and-see modus. The euro had already a good run. In this respect, a sustained break beyond the 1.1514 resistance is not evident. Such a test/break probably needs US data to deteriorate further. We assume it’s too early for that.

The BoE kept a cautious positive assessment on the economy yesterday. Markets evidently didn’t react as the BoE’s view is conditional on an orderly Brexit. The latter looks ever further away. At the EU summit, EU leaders gave UK PM May until April 12 to decided what to do if she doesn’t get the deal approved in Parliament. EUR/GBP briefly jumped above 0.87 yesterday evening. With visibility on the Brexit process becoming foggier rather than clearer, the era of erratic sterling trading also risks to be prolonged for another two weeks.

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