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Will US retail sales revive USD rebound?

Written by By KBC Market Research Desk | 2018-05-15 07:06:06 GMT

Asian equities mostly trade with modest losses overnight. The oil price continues to push higher with Brent above $78/barrel. The US 10-y yield regained the 3.0% barrier. Geopolitical tensions in the Middle East and higher US yields for now tilt the balance again in favour of the dollar. USD/JPY is nearing the 110 mark. EUR/USD also trades with a slightly negative bias (1.1920 area).

Today, the EMU and German Q1 GDP and German ZEW sentiment will be published. Yesterday’s price action shows that the euro is not immune for EMU news. However, the focus for FX trading will probably turn to the US retail sales. Last week’s ‘soft’ US CPI suggests that negative news might make the market more cautious on the scenario of four Fed rate hikes this year. So, the USD probably at least needs an in-line outcome to resume its recent rebound. At the same time, the USD shows good resilience given the rise in the oil price. We also have the impression that the USD profits more from (geopolitical) uncertainty than the euro. Yesterday, we indicated that we didn’t see a trigger for a big USD decline yet. We hold on to that view even as multiple conflicting factors are in play. Yesterday’s rejected test of EUR/USD 1.20 and the solid rise in USD/JPY might give USD bulls some comfort. The 1.1823 correction low is the first reference in EUR/USD ahead of 1.1718.

UK labour data will be released today and the government will again meet on Brexit. UK job growth is expected solid and earnings (ex-bonus) are expected to rise to 2.9% Y/Y. Meeting the consensus could lift the probability of an August rate hike again. After last week’s BoE decision, the EUR/GBP rebound halted near 0.8850. Some modest sterling gains are possible in case of a decent labour report. However, we don’t expect a sustained GBP rally yet.

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