NEWS / Foreign Exchange

USD remains under pressure

• Treasuries hover sideways at start of the week
• European bonds remain under pressure
• USD remains under pressure
• Looking for a new driver

On Monday, the EUR/USD pair kept close to recent highs. The dollar couldn??™t escape the pressure it is facing, despite oversold conditions.

Last Friday, EUR/USD got a boost from a rumour that the US was calling for repatriation of US citizens in Bahrain, out of fear for attacks, due to the Iran crisis. This was denied, but the dollar couldn??™t gain back the lost ground. This is a bad omen.

On Monday, the pair dipped in the early Asian session to the 1.3340 zone, but soon enough the 1.3370 was regained and the euro clung to that for the rest of the session and this morning as well.

The EMU PMI data were of no immediate help to the euro, as it rather stabilized at 55.4 (from 55.6) and the 3-month average declined slightly. It was of no impact though. In the afternoon, the US ISM manufacturing report fell back from 52.3 to 50.9. The USD sentiment was also not much affected, but at least it may have prevented any appetite from dollar bulls to try and fight back for now. The employment sub-index also retreated below the 50 mark (indicating shrinking employment), which may be seen as a warning for Friday??™s payrolls. Although the market is now a bit dollar short (anecdotal evidence of IMM data), there is no signal to go for dollar short covering at this stage.

EUR/USD upside should still be favoured in a buy-euro-on-dip scenario. This is kept in place as long as the pair can manage to stay above recent lows at the 1.3260 zone.

USD/JPY is still keeping its sideways picture intact, but the yen sentiment is only hanging by a thread for now.

The USD/JPY pair is still capped by the 118.50 zone, a recent high. Yesterday, the pair kept a sideways picture at the 117.80 zone, but this morning, the USD is again on the offensive against the yen and this has brought the pair up to the 118.20 area, a whisker away from the 118.50 levels.

A break would definitely be a short-term negative for the yen. It would confirm the picture as it has been developed so many times: periods of yen strength are short and violent and then comes a prolonged period of crawling yen losses, which permits USD/JPY to quietly creep higher and higher. It is typical for the continued build-up of carry trades, selling the yen for other higher yielding currencies.

Today, the calendar is thin, so there are no apparent drivers. The technical picture should be guiding.

The Iran/hostage crisis may be resolved and that was good news fro the sterling. Iran??™s secretary of the Supreme National Security Council , Ali Larijani, said that Tehran wanted to resolved the dispute through diplomacy, not trials.

The sterling likes this, but it was mostly driven by hope yesterday. The shadow MPC of the Financial Times had called for a rate hike and as it has a good track record, it didn??™t go unnoticed.

The UK CIPS survey on manufacturing was less convincing, as it slipped form 55.4 to 54.4 in March. There was no immediate market reaction though as this unspectacular outcome will not have an impact on the BoE decision this week. We feel the sterling should be somewhat supported going into the BoE rate decision, as the market speculates there is a chance on a rate hike. The Bank has surprised the markets (and us) before, so why not now?

Besides this momentum trade, we truly believe the FX market has been too negative on the UK economy and the sterling and call for the sterling rebound to go on for a while further.

We also cal your attention for a potential RBA rate hike in Australia, which could impact Aussiee dollar sentiment. The decision will be taken overnight. (01.30 CET)