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Currencies: USD On Consolidation Modus Ahead Of Tomorrow’s Fed Meeting


Sunrise Market Commentary

  • Rates: Inconclusive, low-volume trading as higher oil prices are ignored
    A surge in oil prices has limited impact on other markets so far. Ahead of tomorrow’s Fed meeting and Thursday’s ECB meeting, we expect more inconclusive, low-volume trading. Today’s US PPI could spark some intraday volatility, but probably without technical consequences. The German 10-yr yield is still testing 0.3% support.
  • Currencies: USD on consolidation modus ahead of tomorrow’s Fed meeting
    The dollar found a bottom yesterday as selling after Friday’s soft US wage data petered out. Today’s eco calendar is modestly interesting. However, the data will probably only be of intraday significance for USD trading as investors look forward to tomorrow’s Fed decision. Sterling traders keep an eye at the UK CPI and the voting on the Brexit bill.

The Sunrise Headlines

  • US stock markets closed 0.25% to 0.5% higher yesterday with energy shares taking the lead on surging oil prices. Overnight, Asian risk sentiment deteriorates as we head to the closing bell (-0.5%).
  • International Trade Secretary Fox said the UK would like a trading relationship with the EU after it leaves the bloc that’s “virtually identical” to the one it has now.
  • The effects of a hairline crack in one of the world’s most important oil conduits is rippling through markets. The Forties Pipeline is being shut after the fault was discovered, pushing Brent over $65/b for the 1st time since June 2015.
  • The EU, Japan and the US are set to announce a new alliance to take on China more aggressively over trade issues such as overcapacity in steel and forced technology transfers..
  • The rapid growth the Trump administration is banking on in its budget will deliver around $1.8tn of extra tax revenue, the US Treasury said, as it aims to validate previous claims that tax cuts can pay for themselves.
  • China will continue its neutral monetary policy with a bias toward tightening next year, according to a front-page commentary in Securities Times.
  • Today’s eco calendar contain UK inflation data, US NFIB Small Business Optimism and US PPI data. Germany holds a 2-yr Schatz auction and the US Treasury sells 30-yr bonds

Currencies: USD On Consolidation Modus Ahead Of Tomorrow’s Fed Meeting

USD on consolidation modus ahead of Fed

There was little news to guide USD trading yesterday. The dollar stayed slightly in the defensive after Friday’s soft US wage data. EUR/USD tried to regain the 1.18 barrier, but the attempt failed. The dollar found a bottom later in the session, supported by a slight intraday rise in US yields and ongoing positive equity sentiment. USD/JPY closed the session at 113.56 (from 113.48). EUR/USD finished the day at 1.1769, little changed from Friday.

Asian equities opened mixed, but lost gradually ground as the trading session proceeded. There is no obvious driver for trading this morning. Oil extends its recent rebound, with Brent trading at the highest level in 2 ½ years. For now there are little spill-off effects on other markets. The trade-weighted dollar holds near the highest level in two weeks. USD/JPY stabilizes in the mid 113 area, despite softer equities. EUR/USD holds in the 1.1775 area. Business confidence and house price data in Australia were soft, but caused no further sustained losses of the Aussie dollar. AUD/USD holds near recent lows in the 0.7500/50 area. The kiwi dollar tries to extend yesterday’s rebound after the nomination of a new RBNZ governor (NZD/USD currently 0.6930).

The eco calendar is moderately interest today with German ZEW investor confidence, US NFIB small business confidence and US PPI data. ZEW investor confidence is expected to ease slightly, but to stay at very lofty levels, especially for the current conditions component. NFIB US small business confidence is expected to improve slightly from 103.8 to 104, a historically high level. US headline PPI is expected to rise 0.3% M/M and 2.9% Y/Y (from 2.8%). A positive PPI surprise might cause some nervousness ahead of tomorrow’s US CPI data and Fed policy decision/statement. It might also be marginally positive for the dollar. However, we don’t expect traders/investor to adapt positions in a profound way on the PPI release, just one day before the Fed. We expect more technically driven sideways USD trading. Yesterday’s USD price action might be an indication that the downside is rather well protected. Further progress on a US tax bill further support this. Evidently, tomorrow’s Fed policy decision/guidance holds the clue for the next directional move of the dollar. We assume that the Fed will stick to a scenario of 3 additional rate hikes next year, which should be good for USD

From a technical point of view: EUR/USD set a post-ECB low mid-November, but the dollar’s momentum wasn’t strong enough. EUR/USD settled in a directionless sideways consolidation pattern in the 1.17/19 area. A return below 1.1713 would signal an improvement in the ST USD momentum. The payrolls were unable to force this break. EUR/USD still gives no clear directional signal. Next support comes in at 1.1554 (November low). USD/JPY’s momentum deteriorated early November, dropping below the 111.65 neckline. No aggressive follow-through selling occurred though. Over the previous two weeks, the pair succeeded a nice rebound, calling off the downside alert and returning to the 110.84/114.73 consolidation range. We amended our ST bias from negative to neutral. We maintain the view that a sustained break north of 115 won’t be easy.

EUR/USD in consolidation modus ahead of tomorrow’s Fed meeting

EUR/GBP

Will UK CPI exceed 3.0%?

Sterling continued the slide that started after Friday’s press conference of EC Juncker and UK PM May on a ‘separation deal’. The agreement clearly was far away from a detailed, legally binding text. A commission spokesman called it a gentlemen’s agreement. Several hot topics were avoided last week in order to be able to move to the next stage of negotiations. The feeling that little progress has been made erased last week’s tentative sterling optimism. Sterling ceded further ground against the euro and the dollar yesterday. EUR/GBP closed the session at 0.8823 (from 0.8792). Cable finished the day at 1.3341 (from 1.3390).

Policy makers from both sides and financial analysts continue to float ideas on what the next steps in EU-UK negotiations should be and on how the future relationship may look like. In this respect, UK trade Secretary Liam Fox indicated that the UK wants a deal that is virtually identical to current trade relationship. He also suggested that paying the separation bill might be linked to reaching such trade deal. This analysis obviously isn’t shared by EU chief negotiator Barnier. We also keep an eye on the handling of the Brexit bill in the UK Parliament. UK November CPI will be published today. UK Headline CPI is expected unchanged at 3.0% Y/Y. BoE Carney will have to explain the overshoot in a letter to the chancellor for the Exchequer in case of a rise north of 3.0%, potentially causing some debate whether the BoE should move sooner with a next rate hike. However, we doubt that it will change the BoE’s assessment as the central bank anticipates that inflation could peak slightly above 3.0%.

Recent developments pushed EUR/GBP lower in the 0.8690/0.9033 consolidation pattern. EUR/GBP tested 0.8693 support (62% retracement) on Friday,, but the test was rejected. Next support comes in at 0.8653. We assume that the 0.8653/90 area won’t be easy to break short-term. We hold a neutral bias on EUR/GBP short-term. We consider a return to the bottom of this range as an opportunity to reduce sterling long exposure against the euro.

EUR/GBP rebounds in the established trading range despite Brexit deal

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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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