USD Stays in the Defensive Despite Decent ISM
On Wednesday, risk sentiment deteriorated in Europe. Mediocre
Chinese data, a poor OECD outlook and rising Brexit tensions weighed on
global sentiment.
The subsequent decline in core bond yields narrowed interest rate
differentials between the dollar and the other majors, weighing on the
USD. Tensions eased later in the session as the US manufacturing ISM
printed stronger than expected. Equities rebounded and bonds came off
the intraday highs.
However, it didn’t help the dollar much. EUR/USD closed the session at
1.1188 (from 1.1132 on Tuesday). USD/JPY rebounded slightly and finished
the session at 109.54, still substantially lower from Tuesday (110.73).
Overnight, Asian equities trade mostly in negative territory despite a decent close in the US. Japanese equities show losses of about 2.0%. Investors are uncertain on the impact of the delay in the sales tax hike to October 2019. At the same time, there was speculation on a fiscal stimulus package. However, the Japanese government didn’t given any details yet, weighing on sentiment. The yen profits from domestic and global uncertainty with USD/JPY again trading in the low 109 area. Australian data were mixed (disappointing retail sales but also a lower trade deficit). Slight initial gains evaporated portably as AUD/JPY selling weighed. AUD/USD trades currently in the 0.7245 area. Despite a good ISM, the dollar also remains in the defensive against the euro. EUR/USD trades in the 1.12 area as investors await the ECB’s policy decision.
Today, the eco calendar contains the US ADP report and jobless claims, but more attention might go out to the ECB meeting. Fed’s Kaplan & Powell and ECB’s Nowotny and BoE’s Carney are also scheduled to speak. In April, both the ADP report and official BLS reading showed a significant slowdown in hiring in the US. For May, the consensus is looking for a slight pick-up in ADP hiring to 174 000 from 156 000 in April. We believe that the risks are for an upward surprise as activity seems to have picked up at the start of the second quarter. Jobless claims are expected to have picked up slightly in the week ending the 28th of May, from 268 000 to 270 000, but we continue to see downside risks. The ECB is widely expected to leave its policy unchanged. In the press conference, the details of the corporate bond buying program might be discussed. Markets will also look for the new inflation and growth forecasts. A slight upward revision is possible. Markets might consider this as reducing chances for further easing.
Yesterday, investors were apparently scaling back
EUR/USD shorts going into the ECB policy meeting. The ADP shouldn’t be
that bad for the dollar. At the same time, the ECB raising the growth
and inflation forecasts could be ST euro supportive. Risk sentiment and
oil remain a wildcard. In a day-to-day perspective, EUR/USD can stay
well bid going into tomorrow’s US payrolls.
USD/JPY looks ever more vulnerable if risk sentiment turns further negative. We keep a negative bias for USD/JPY.
Technically, the March/April USD decline petered out. The dollar rebounded on more hawkish Fed comments/Minutes that opened the door for a possible June rate hike. We assume 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 the 1.1217/1.1144 area. A sustained break below this level would be USD positive. This week’s US data will decide whether such a break is warranted. USD/JPY rebounded for the early May lows. Verbal Japanese interventions and a global USD rally blocked the downside of USD/JPY early May. The pair started a gradual but steady rebound. The high 111 area is a strong resistance, which won’t be easy to break. Since early this week, the USD rally ran into resistance and sentiment on risk turned less positive, capping the topside in USD/JPY. We still expect a scenario of a further correction lower in USD/JPY as the risk rally might have run its course.
Brexit haunts sterling
Yesterday, sterling remained under pressure as polls indicated that the remain-camp might lose its lead in the run-up to the June 23 EU-referendum. EUR/GBP started a new intraday uptrend from the beginning of trading in London to trade in the 0.77 area at the time of the UK mid-morning data. Credit data were below expectations (partially because of a change in taxation). The Manufacturing PMI rebounded out of contraction territory from 49.2 to 50.1. The report was a bit stronger than expected, but not enough to support sterling. EUR/GBP extended gains north of 0.77 and finished the session at 0.7761 (from 0.7686). The decline in cable was more modest as the dollar was also in the defensive. Cable finished the session at 1.4416 (from 1.4483).
Today, the UK construction PMI will be published. A stabilization at 52.00 is expected. We expect this indicator to be only of intraday significance for sterling trading. The focus will remain on Brexit. Recent polls showing rising chances for the Brexit camp, raised uncertainty/volatility and weighed on the UK currency. We expect sterling to remain in the defensive as the campaign on the EU referendum intensifies. A sustained break above 0.7750 would be a first indication of further deteriorating sterling sentiment.
