Sterling takes a breather on recent gains

Moves in the major currency cross rates stay moderate even as geopolitical tensions rise

Yesterday, risky assets returned part of Wednesday’s gains. This ‘risk‐off’ sentiment supported core bonds but the impact on currencies was limited. EUR/USD held a very tight range in the lower half of the 1.35 big figure. US eco data were mixed and were again no factor of importance for USD trading. USD/JPY and EUR/JPY traded with a downside bias and the decline accelerated as the headlines of the plane crash in Ukraine filtered through.

This morning, the focus on Asian markets remains on the crash of the Malaysian Airlines plane and its potential political implications. Sentiment in Asia remains risk‐off, but the losses on Asian equity markets are rather moderate. Chinese markets even show limited gains as investors anticipate that Chinese authorities might take action to stop the decline in house prices. USD/JPY and EUR/JPY are even rebounding off the overnight low. EUR/USD is again changing hands around yesterday’s levels in the 1.3525 area.

Later today, the calendar in Europe is thin. We keep an eye at a speech of ECB Weidmann in Madrid. In the US, the consumer confidence from the University of Michigan and the leading indicators will be published. In ‘normal circumstances’ the Michigan consumer confidence has potential to move the currency market. A moderate rise from 82.5 to 83 is expected. A strong figure should in theory be positive for the dollar. However, the focus of (currency) markets might be on geopolitical tensions in the wake of the MAS airplane crash. European equities will probably be hit the hardest as tensions between Europe and Russia might intensify. However, the impact from a global risk‐off correction on currencies is not always that straight‐forward. A rise of the yen against the dollar and the euro is the most logical scenario, but both USD/JPY and EUR/JPY show tentative signs of bottoming out this morning. So, the picture is far from clear. USD/JPY is also coming within reach of the key 100.75 range bottom. A break below that level would by highly significant, but we have the impression that the time is not yet ripe for such break. For that to happen, global risk aversion probably has to become more stretched. Regarding EUR/USD, we cannot but see the Ukraine developments as a negative for the euro. Overnight, US bonds yields also show some signs of bottoming out. So, from here interest rate differentials might again move in favour of the dollar. The reaction of currencies on geopolitical risk is not always evident, but we still put the risk for EUR/USD to go for a test of the key 1.3503/1.3477 support area.

Recently, we had a neutral bias on EUR/USD short‐term. In a longer term perspective, the gradual rise of the dollar against the euro will probably stay intact. However, short‐term we didn’t see a trigger for EUR/USD to break below the 1.3503/1.3477 support. The Fed’s soft tone deprives the dollar from further interest rate support. Even strong US payrolls and/or the mini‐crisis on Portugal were unable to push EUR/USD out of the sideways consolidation pattern confined by the range bottom at 1.3477/1.3503 and the 1.3734 range top. Until now, a cautious sentiment on risk was seldom a help for the dollar but recently we had the impression that this pattern could gradually change.

Sterling takes a breather on recent gains

There were no important eco data in the UK yesterday. This allowed sterling investors to take a breather and to digest the price swings after the publication of the labour market data and the CPI, earlier this week. High inflation and mixed labour data had pushed EUR/GBP temporary below the 0.79 barrier, but sterling fell prey to some short‐term profit taking yesterday, both against the euro and the dollar. EUR/GBP rebounded to the 0.7910 area early in the session and stayed in that area for the remainder of the day. Cable was also under moderate pressure and slipped to the low 1.71 area. For now, this is nothing more than normal profit taking.

Later today, there are again no important eco data in the UK releases. So, technical considerations might again prevail for sterling trading. Yesterday, sterling corrected slightly lower after the recent gains, but the global picture hasn’t changed. The geopolitical tensions are no big issue for sterling. More downside pressure on EUR/USD might keep EUR/GBP under pressure, too. For cable we expect more sideways trading in the low 1.71area.

Recently, EUR/GBP stayed within reach of the cycle lows, but the decline slowed. The UK news was a bit more mixed and the negative headlines from Europe had no big negative impact on the single currency. However, Tuesday’s jump in UK inflation and the decline of EUR/USD post Yellen, brought sterling back to the recent highs against the euro (and the dollar). The standing EUR/GBP downtrend remains intact. The decline slowed yesterday, but we maintain a sell‐on‐upticks bias.