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Currencies: Dollar Rally Slows


Sunrise Market Commentary

  • Rates: Core US and European bonds hover near recent correction low
    On Friday, core bonds hardly profited from ongoing turbulence on the equity markets. A late session rebound of US equities even reversed minimal intraday gains. Today, the eco calendar is empty. Price action in Asia suggests that global market volatility might ease. However, it won’t help core bonds. Wednesday’s US CPI is the next milestone for global bond markets.
  • Currencies: dollar rally slows
    EUR/USD dropped to the low 1.22 area on Friday, but the dollar rally did run into resistance as equities rebounded. Short-term, we expect EUR/USD to settle in a 1.22/24 consolidation pattern going into Wednesday’s key US CPI release. Uncertainty on the UK ‘road to Brexit’ continues to weigh on sterling

The Sunrise Headlines

  • US equitiesUS equities rebounded in the US afternoon session on Friday, finishing a turbulent week on a positive tone. The major US indices showed gains of about 1.5%. Asian equities and US equity futures are trying to extend Friday’s WS rebound this morning. Japanese markets are closed for a holiday.
  • Australia’s big banks are responding to a revenue crunch by cutting jobs and other costs, prompting fears on the eve of an inquiry into their businesses that the industry’s tarnished reputation is about to take another hit.
  • China will boost its job creation effort and promote entrepreneurship this year. Meng Wei of the National and Development Reform Commission (NDRC) said China needs to create jobs for 9.7 mln registered as unemployed and 8.2 mln new college graduates, as well as workers affected by industrial capacity cuts.
  • ECB’s Nowotny sees recent setback in equities ‘as a normalization, a reasonable wake-up signal to show that stock markets can’t just keep rising all the time. According to Nowotny the task of central banks isn’t to satisfy markets but to ensure overall economic stability. So if necessary, interest rates will have to rise and markets will adapt to that”
  • Prime Minister Theresa May will attempt to unite her cabinet and convince the European Union that Britain knows what it wants from Brexit. The UK Prime Minister and other senior ministers will give six speeches in the next few weeks to clarify what Britain sees as ‘The Road to Brexit’.
  • Today’s eco calendar is almost empty with no important eco data in Europe and in the US. Markets are mainly looking forward to the key US CPI report to be published on Wednesdaylendar is almost empty with no important eco data in Europe and in the US. Markets are mainly looking forward to the key US CPI report to be published on Wednesday

Currencies: Dollar Rally Slows

USD rebound slows

On Friday, the repositioning on bond and equity markets still gave no clear guidance for the USD. EUR/USD filled bids in the low 1.22 area as US equities set new ST lows, but rebounded in line with equities toward the US close. EUR/USD finished the day little changed (1.2252). USD/JPY showed a similar pattern. The pair dropped to the low 108 area but closed at 108.80. The yen gains slightly ground at times of extreme equity stress, but returned the intraday gains when tensions eased.

Asian equity markets entered calmer waters after Friday’s late session rebound in the US. Regional equities show gains of up to 1%+. Japanese markets are closed for a holiday. Easing tensions are weighing on the US dollar. EUR/USD rebounds to the high 1.22 area. USD/JPY hardly profits. The pair trades in the 108.70 area.

There are no important data in the US and Europe today. So, FX trading will still look for guidance from global (equity) markets. Later this week, the US CPI (Wednesday) will take center stage. Headline inflation is expected to ease from 2.1% Y/Y to 1.9%. The core measure is expected to soften from 1.8% Y/Y to 1.7%. At the same time, US January retail sales will be released. EMU (Thursday) and Japan (Wednesday) will publish Q4 GDP growth. Markets will also monitor CB speeches, looking for guidance on the CB’s reaction function after recent market turmoil.

Last week, the combination of higher yields and an aggressive risk-off was a mildly USD positive. This morning, the dollar is ceding slightly ground as global tensions are easing. However, with US yields near recent peaks, the correction shouldn’t go very far. We assume EUR/USD to settle in a wait-and see modus in the 1.22/1.24 area going into the CPI release. Technically, the dollar decline slowed. EUR/USD dropped below the 1.2323/35 support. A break below 1.2165 would call off the ST downside alert (for USD).

On Friday, the sterling declined further as EU’s Barnier warned Britain that a post-Brexit transition period is not a given. EUR/GBP spiked higher to the 0.8875/80 area. Today, there are no UK data. Over the next weeks, UK PM May will try to bring clarification on the ‘road to Brexit’ that Britain wants to walk. For now, it is far from sure that this will bring back calm to the UK political scene. EUR/GBP is trending higher in the 0.8690/0.9033 trading range, with intermediate resistance at 0.8930. We hold our basic view that the 0.8690 support probably won’t be easy to break without big progress on Brexit.

EUR/USD: dollar rebounds slows

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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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