USD Stabilizes Near Recent Highs

USD Stabilizes Near Recent Highs

24 May 2016, 09:11
Roberto Jacobs

USD Stabilizes Near Recent Highs

On Monday, there was no big story to guide USD trading. The dollar opened slightly in the defensive as European equities traded volatile. Especially USD/JPY drifted further below 110. Later US bond yields rose slightly as Fed rate hike speculation was still at work; putting a floor under the dollar.
USD/JPY closed the session at 109.24, down from 110.15. EUR/USD dropped temporary below 1.12 but finished at 1.1220, little changed from Friday.

Overnight, Asian equities show modest to moderate losses, as the rising probability of a Fed rate hike and a strong dollar/Asian currencies weighs.
USD/JPY is the exception, as a slight risk-off sentiment supports the yen. USD/JPY trades around 109.40. Japanese Fin Min Aso defined a two-day move of 5 yen as being one-way and disproportionate, but stressed that Japan has no intention to devalue the yen. A stronger dollar also weigh slightly on commodities. AUD/USD dropped below the 0.72 handle. RBA governor Stevens stressed the bank’s commitment to reach the inflation target, as he described current inflation as very low. He said that the A$ currently does what it is expected to do. EUR/USD is again little changed., holding in the 1.1210 area.

Today, the May German ZEW indicator is forecast to increase marginally from 11.2 to 12.0, but risks are for a stronger increase as better than expected Q1 GDP data might support sentiment. In the US, new home sales are expected to show a limited rebound in April, by 2.0% M/M to 521 000 following three consecutive monthly declines. We see risks for an upward surprise supported by better weather conditions and increasing inventories. Finally, the Richmond Fed manufacturing index is forecast to drop from 14 to 8 in May, with downside risks. The data will only be of intraday significance for USD trading. Positive headlines from the Eurogroup meeting on Greece might support global risk sentiment, but it is an ambiguous factor for EUR/USD. Should it be positive for the euro or will the rise in core bond yields support the dollar? So, trading in the major USD cross rates might be again indecisive until really strong US data or a signal of Yellen convince markets more firmly on the Fed’s rate hike intentions.

Technically, the March/April USD decline petered out and in May the dollar strengthened, gradually supported by more hawkish Fed comments/Minutes that opened the door for a possible June rate hike. We maintain our view that the US economy is strong enough to allow the Fed to implement two rate hikes this year. If the eco data don’t disappoint, chances for a June rate hike increase, supporting the dollar. EUR/USD dropped temporary below a first support at 1.1217 but no follow-price action followed, keeping EUR/USD in a short-term consolidation pattern. USD/JPY dropped to new lows early May.
Verbal Japanese interventions, hawkish Fed talk and a global USD rebound blocked the downside of USD/JPY. The high 111 area is an important resistance, where USD/JPY might run into resistance if global risk sentiment would worsen (due to higher US rates or other event risk). The US disapproval for yen interventions is yen supportive if sentiment would turn risk-off.


Sterling loses slightly ground after recent rally

On Monday, in absence of eco data, the focus was again on the Brexit saga.
Sterling opened strongly as polls confirmed the ‘remain’ camp was still in pole position. EUR/GBP dropped temporary to the 0.77 area. Later in the session, both PM Cameron and Fin Min Osborne highlighted the potential disastrous impact of a “leave” outcome for the UK economy. However, it didn’t help sterling. EUR/GBP returned to the mid 0.7750 area and closed the session at 0.7745, from 0.7736 on Friday. Cable finished the session at 1.4484 (from 1.4502 on Friday). So, for now sterling didn’t profit anymore from rising expectations on a remain outcome.

Today, the Distributive trades index is expected to rebound from an awful -13 last month to 8. Last week, sterling profited from strong ONS retail sales, but the market reaction to the CBI data is usually more modest. Markets will also keep a close eye at the parliamentary hearing of several BoE governors, including governor Carney, on the BoE inflation report. The BoE will probably be grilled on its Brexit assessment by the pro-Brexit supporters. A heated debate on Brexit might be slightly negative for sterling in a daily perspective.

Of late, the sterling negative momentum eased. Markets adapted positions to a lower probability of a Brexit. However, at the end of last week there were tentative signs that the sterling rebound was losing momentum. EUR/GBP dropped below a first range bottom at 0.7735, but without follow through losses. A test of the 0.7650 support was rejected. Some further correction on the recent sterling gains might be on the cards.


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