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Dollar Slightly In The Defensive Post-Payrolls

Sunrise Market Commentary

  • Rates: First reference by Fed governor to March rate hike
    US Treasuries erased gains at the end of US dealings on Friday as SF Fed governor Williams said that he sees some arguments to raise rates in March. Today’s eco calendar is empty apart from a speech by ECB President Draghi, but we expect him to hold his dovish line. Trading on bond markets will likely be sentiment-driven and technical in nature.
  • Currencies: Dollar slightly in the defensive post-Payrolls
    The dollar is holding near the recent lows against most majors as soft US wage growth eased Fed rate hike expectations. Today, the eco calendar is thin. We keep a close eyes at the technicals. Especially USD/JPY is nearing an important support area. Sterling traders will keep an eye at the Brexit debate in the UK parliament

The Sunrise Headlines

  • US equities profited from the US payrolls report and held on to the gains as president Trump took the first measures regarding deregulation They closed with juicy gains. Asian equities trade modestly higher in the opening session.
  • President Trump was criticised by prominent Republicans after saying in a televised interview that the US was no better than Putin’s Russia. His position on Russia remains very unclear.
  • Investors piled into bank shares on Friday following news that Donald Trump will begin the process to undo parts of the Dodd-Frank financial reform law. The S&P 500 financials sector advanced 2%.
  • German factory orders boomed in December, up a very strong 5.2% M/M and 8.1% Y/Y, up from 2% Y/Y in November. It confirms that the German economy had got momentum, coming into 2017. Figures looks nevertheless distorted somewhat by some big-ticket orders.
  • Romania’s government scraped disputed changes to corruption legislation in reaction of widespread protest that asks the resignation of the government.
  • Fitch confirmed the BB+ rating of Portugal and the AA+ rating of Austria, both with stable outlook
  • The pace of growth in China’s services sector softened in January. The services Caixin PMI fell slightly to 53.1 in January from 53.4 previously. The official PMI, earlier reported (more dominated by state enterprises) had strengthened a bit. Also the Caixin manufacturing PMI softened slightly.
  • Wolfgang Schäuble, German finance minister, has blamed the European Central Bank for an exchange rate that is "too low" for Germany.
  • Today, quasi empty eco calendar, but the speech of Draghi may be interesting

Currencies: Dollar Slightly In The Defensive Post-Payrolls

Dollar holding near the recent lows post payrolls

On Friday, the dollar didn’t go anywhere before the US payrolls report. The outcome was mixed with very solid job growth, but a big miss in wage growth. The latter prevailed for interest rate markets and for the US dollar. The dollar declined even as equities rebounded. EUR/USD rebounded close to the 1.08 big figure and closed the session at 1.0783 (from 1.0759). USD/JPY finished the session at 112.61 (from 112.80).

Overnight, Asian equity markets are trading in positive territory, joining the rebound in the US on Friday. The China Caixin Services (and composite) PMI’s declined in January, but there is no obvious negative impact on Chinese or other regional equity markets. The dollar is holding near the recent lows against the likes of the euro and the yen. Some other Asian currencies are outperforming , trading at multi-week highs against the US currency. USD/JPY is hovering in the 112.50 area. No real test of the 112.06/08 recent lows occurred yet, but the area stays within reach. EUR/USD is trading in the 1.0775 area. During the weekend, German Fin Min Schauble in an interview said that the euro was too low for Germany.

Today, besides the German factory orders, released this morning (see headlines), the calendar is devoid of market moving eco data. ECB Draghi will speak before parliament, but we expect him to keep to the script of the last ECB meeting (defending policy). ECB Smets (majority Draghi camp inside the ECB) speaks in Brussels, while Fed Harker speaks on payments systems late this evening. We don’t see a clear driver for USD trading and start the week with a USD neutral bias. We keep though a very close eye at the technical charts as the dollar is near key support levels against several majors. Especially USD/JPY is near key support (112.06/08 and 111.16). A break below this level would be technically relevant also for the broader USD sentiment.

Global context. The dollar is in a (presumed) corrective downtrend against most majors since the start of January. The USD rally due to the Trump reflation trade petered out. Interest rate differentials in favour of the dollar narrowed. Trump politics/communication is becoming a sources of global uncertainty that weighs on the dollar. EUR/USD broke a minor resistance at 1.0775. Next resistance is coming in at 1.0874. The day-to-day USD momentum has become more fragile. A return above EUR/USD 1.0874 would question the short-term USD positive outlook. At some point, the absolute interest rate support should provide a USD floor, especially as the Fed is still expected to continue its monetary policy normalisation. Friday’s US payrolls were OK, but low wage growth eased market expectations on the Fed’s rate hike trajectory, keeping the dollar in the defensive. We wait for technical signals that the USD correction has run its course. USD/JPY is trading well off the post-Trump highs (118.60/66). The recent rebound off the lows (112.08) wasn’t convincing. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is the next key support. A break below this area is clearly USD negative.

EUR/USD: Holding near the recent highs


Brexit debate remains focus of sterling trading

On Friday, the UK services PMI dropped from 56.2 to 54.5, confirming a slight softening of growth in the manufacturing and the construction section. The outcome still suggests decent growth. Even so, services are facing accelerating input costs. In the wake of Thursday’s relatively soft BoE communication, markets gave slightly more weight to the softer growth as indicated by the PMI rather than to rising price pressures. Sterling lost modest ground after the release and rebounded (temporary) above 0.86. The soft US payrolls and the rise of EUR/USD also supported EUR/GBP. The pair closed the session at 0.8640 (from 0.8588). Cable also didn’t profit from the post-payrolls USD weakness. The pair closed the session at 1.2484.

Today, only the UK car registrations are scheduled for release. So, the focus of UK investors might be on the Brexit Debate in the UK Parliament. The usual dynamics between majority and opposition will probably be at work, but in the end PM May will probably get the green light to trigger article 50 of the Lisbon Treaty. The debate in Parliament might be neutral to slightly negative for sterling in a day-to-day perspective. Last week’s balanced approach of the BoE capped the topside of sterling and helped to started a cautious bottoming out process for EUR/GBP. EUR/GBP 0.8450 support looks again a bit better protected. A cautious buy-on-dips approach is preferred. The price action in cable also suggests that further sterling gains against the dollar won’t be easy.

EUR/GBP: 0.8450 support better protected after soft BoE policy assessment

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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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