Dollar remains in limbo
|Days come and days go, but the dollar cannot find direction. The decline of the oil price and the potentially negative impact on interest rates weighed marginally on the dollar yesterday morning. However, the decline of oil halted and even reversed modestly in the afternoon, allowing the dollar to gradually eke out small gains. The eco data were ignored.
Overnight, listless trading in Asian equity markets following the unchanged closure of WS yesterday. Brent crude is modestly higher in an unconvincingly sluggish rebound after steep price falls. The US T-Note barely budged. In this context, the lethargic FX trading of the majors continued. EUR/USD trades insignificantly higher at 1.1162. USD/JPY is unchanged at 111.34.
Eco calendar heats up, Fed speakers take the stage
The eco calendar is more interesting for the first time this week. Markets expect a marginal decline of the EMU PMI business sentiment, but at high levels suggesting the upside momentum is still intact. An upward surprise is possible after yesterday’s unexpectedly strong EMU consumer confidence. French INSEE business confidence was marginally stronger in June versus May. US manufacturing and services PMI are expected mixed. The former a tad stronger and the latter a bit weaker than in May. However, at levels well below the EMU ones. US New Home sales fell sharply in May and we side with consensus in expecting a moderate rebound. After the European close, Fed governors Bullard (dove), Mester (hawk) and Powell (moderate who speaks on clearing) will give speeches. The WSJ reports already today that Bullard finds the Fed’s rate path unnecessarily aggressive, but he backs the speedy start of the Fed’s balance sheet tapering, to create policy for eventual “rainy” days.
Given the eco calendar, stronger EMU PMI’s could help EUR/USD higher, but we think that after May’s sharp rise of the euro, the consolidation period is not over. Therefore, any EUR favourable upward surprise would give only a modest, technical insignificant boost for EUR/USD. The downside of the pair is limited too until the USD gets better eco news, signs that trump’s pro-growth agenda get again traction or interest rate support. We don’t see this happening in the next few days. The sluggish oil recovery is, if anything, slightly dollar negative. We maintain a neutral stance on EUR/USD today.
Technical picture still negative for EUR/USD
Early May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and US political upheaval propelled EUR/USD north of the 1.1023 range top. The pair tested the 1.1300 area going into the FOMC decision, but the test was rejected. So the Trump top/correction top at 1.1300/1.1366 proved to be a solid resistance. USD sentiment will have to become really negative to clear this hurdle. EUR/USD 1.1110 is a first minor support (tested yesterday but no break). A return below 1.1023 would indicate that the upside momentum has eased.
The USD/JPY rally ran into resistance in early May. A mini sell-off mid-May made the short-term picture negative, driving the pair further down in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair beyond a first minor resistance at 110.81. A break beyond the 112.13 correction top would improve the ST-picture. The day-to-day sentiment improved slightly of late, but we remain cautious to forecast a U-turn.
EUR/GBP drops below the 0.88 pivot
After Wednesday’s soft BoE Haldane comments inspired swings, sterling shifted yesterday in wait-and see modus. The CBI trends orders were again stronger than expected, but with no lasting impact on sterling trading. In late afternoon, EUR/GBP followed EUR/USD lower and sterling even outperformed the dollar maybe due to MPC Forbes. The Outgoing MPC member made her case for policy tightening one last time. EUR/GBP dropped below 0.88 to close at 0.8794 (from 0.8813 on Wednesday). Following a steep rise since mid-May, EUR/GBP looks ready for a pause or even a correction, but that may only be a temporary respite. A technical relevant break lower (see below) is needed for us to become more sterling optimistic. Cable held an extremely tight range before closing at about 1.2682 (from 1.2671).
Today, the UK calendar is empty. Strong EMU business sentiment might be a euro positive, but recent price action suggest the euro rally has become tired and thus the upside should be limited. Weaker EMU data could push EUR/GBP lower, but sterling gains should be corrective in nature.
From a technical point of view, EUR/GBP extensively tested the 0.8854 area (2017 top), but a real break didn’t occur. BoE comments caused some intraday volatility recently. In the end, the 0.8854/66 resistance remains within reach. A break would open the way to the 0.90 area. A return below the 0.8655 correction low would indicate easing pressure on sterling. Such a break lower will be difficult. A EUR/GBP buy-on-dips approach remains favoured.
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