- Treasuries slightly higher on weaker data
- European bonds testing key levels
- Sterling unaffected by release of 15 Britons
- Receding geopolitical tension fails to inspire markets
The USD upturn seen on Tuesday on the better pending home sales, was gradually erased during yesterday??™s session. EUR/USD ticked again up from the morning??™s 1.3330 zone to the 1.3360 area by the evening.
In the early afternoon, Iranian President Ahmadinejad announced that the 15 captured British marines and sailors would be released as a ???gift??™ to London. Immediately the markets reacted, giving a sigh of relief, albeit a very small sigh. There had already been some speculation as Iran and the UK had toned down hard language the previous 24 hours.
So the impact was all in all very small, with an EUR/USD downtick towards the 1.3340 zone, but in the following hour the pair already reached pre-announcement levels. It was back to business as usual.
Earlier on the day, the ADP employment report came out slightly below expectations, again highlighting the risks for Friday??™s national payrolls report. The market is somewhat concerned about this and this is holding the dollar back for now. The ISM non-manufacturing report also showed the index couldn??™t rebound.
We already were sceptical of the dollar for some time, so this view is maintained as we believe in a sell-USD-into-strength approach. We would have to stop-loss though should EUR/USD slip below 1.3260.
Today, the agenda is really thin, so it would surprise us to see any big moves, unless unexpected events occur.
Over the past 24 hours, USD/JPY dipped slightly, as the pair retreated form week highs at the 118.90 zone towards the 118.50-60 area this morning. This is an often seen pattern: the pair broke above resistance at 118.50 and now this zone is being tested as a potential support area.
As long as the break is maintained, this would be a short-term negative signal for the yen. It confirms the picture as it has been developed so many times in the past: periods of yen strength are short and violent and then followed by a prolonged period of slowly developing yen losses. It may be a typical sign of carry trades being set up day in day out and while they are unwound in times of some panic/risk aversion. Then everybody wants to get out at the same time through a small door, provoking fast and sharp price movements.
We still see some more danger of yen weakness, as there is no trigger visible to push it the opposite way. Tension in the Middle East has abated for now. Rate differentials also are no driver, with the Japanese Central Bank expected to take an extended holiday, not just for Easter, but most likely until after the Summer and its elections (end July).
Today is BoE-day for the UK markets. The Bank of England will give its rate decision today at 13.00 CET. It is very difficult to predict what they will do.
A rate hike should definitely be on the table for discussion. If the Bank decides to hike this would be a sterling positive in a first off reaction.
If it decides to wait, it could make some players take profit on the sterling. In that case though, we would go for buying the sterling on such a dip, as we see a May rate hike as a major possibility and a carrot for the FX markets to run after.
We also believe the FX market sentiment has been a bit too sterling negative for a while and now is the time for some more correction on this phase.
Yesterday??™s data didn??™t rattle the markets, with the euro zone PMI declining slightly form 57.5 to 57.4 now, while the UK CIPS survey on services showed a small rebound from 57.4 to 57.6. At first glance this should be beneficial for the sterling, but the overall report showed some soft spots in the UK, with employment and outstanding business dipping.
The release by Iran of the 15 Britons also seemed to be regarded as ???old??™ news for the sterling. It has to be said that the impact of the capture of these military at the time also didn??™t have a tremendous impact on sterling sentiment.