Dormant FX markets, awaiting geopolitical events

Yesterday, FX markets were looking for new geopolitical developments, as the eco calendar was nearly empty and Japanese markets closed. However, they kept looking, but nothing eventful occurred. The appetite on risk remained subdued though. In this context, EUR/USD tried to move away from key support around 1.35,that was tested on Friday at the end of the thinly Asian session. The pair opened at 1.3545 in Europe, but soon fell to 1.3520/25, where it hovered uneventful for the remainder of the day, closing at 1.3522, unchanged from Friday’s close. USD/JPY didn’t show more momentum, as movements were small in the absence of Japanese traders (holiday).

Overnight, FX markets remained dormant. EUR/USD is status quo at 1.3525 with the intra-day moves limited to an unseen 10 pips. USD/JPY shows barely more volatility and changes hands around 101.45/50, little changed from opening levels of 101.40. US Treasuries are little changed too, but Asian bourses are positively oriented with Japanese and Chinese equities even doing well. Indonesia, awaiting presidential election results, is the only bourse with losses.

Today, the US eco calendar heats up with the CPI inflation data, the Richmond Fed index and existing home sales. In June, US CPI inflation is forecast to have stabilized at 2.1% Y/Y, the highest level since October 2012. On a monthly basis, CPI is forecast to have increased by 0.3% M/M, partly due to higher gasoline prices. We expect that higher energy prices will be partly offset by sharp discounts at the start of the summer sales. We have no reasons to distance ourselves from the consensus. The Richmond Fed manufacturing index weakened from 7 to 3 in June, but a limited uptick is expected for July. The consensus is looking for an increase to 5, but after the strong Philly Fed and NY Fed index, we believe that the risks are for an upward surprise. Finally, existing home sales are forecast to have increased for a third straight month in June. An increase by 1.6% M/M to 4.97 million is expected. We believe however that the risks are for a weaker outcome as the housing market recovery remains fragile and limited inventories continue to weigh on sales.

Regarding FX trading today, the eco calendar is fairly neutral. An eventual upward CPI outcome, which is not our favourite outcome, might strengthen the dollar, but it is unlikely enough for a clean break of the 1.3491/77 key support area. On the geopolitical scene, there is some modest positive news. Chances of a cease-fire in Gaza increased as US State Secretary Kerry visits Cairo, while the Ukraine rebels have transmitted the black boxes of the Malaysian airplane to the Malaysian authorities. So, Asian equities are doing fine, but investors in the major FX crosses clearly still stay sidelined, awaited more geopolitical news.. If the risk-on news becomes more dominant on Gaza and Ukraine, we would nevertheless expect some positive impact on USD/JPY and EUR/USD., especially as both pairs are near key technical support levels. Should the risk-off again starts to dominate (no signs of that this morning), we might see USD/JPY 101.75 and EUR/USD 1.3491/77 come under pressure.

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 1.3477/1.3491 and the 1.3734 range top.

Sterling consolidation continues

Yesterday, sterling trading lacked momentum, as no new impetus was available. As a consequence, technicals prevailed. As sterling set a new high against the euro early last week and kept near the highs versus the dollar, there was scope for some correction, which started mid last week. Admittedly, the correction is minuscule, but it continued yesterday. EUR/GBP closed at 0.7919, up from 0.7915 and cable fell to 1.7076 from 1.7088 previously.

Today, the UK calendar heats up. Besides the budgetary results for June, the CBI releases its industrial trends survey for July. The former will be ignored, but the latter may affect markets (most likely only temporary). The monthly and quarterly total orders and business optimism are at high levels, just like the PMI’s and other eco data. A small decline wouldn’t be a disaster, but it might stimulate some more profit taking, also in the light of the technicals. So, we have a ST (today) negative bias for sterling.

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. We maintain a sell-on-upticks.