USD in wait and see mode ahead of the payrolls

Yesterday, global markets adapted positions in the wake of Wednesday’s strong US GDP data and the Fed’s policy statement. A higher than expected cost employment index reinforced that debate on need for policy tightening in a not that distant future. The repositioning was in the first place visible in bonds and equities. Equities were sold. Yields initially continued to rise, but most of this move was undone as the equity sell-off accelerated. The dollar stayed well bid, but failed to take out the short term top against the euro and the yen reached on Wednesday.

Overnight, most Asian equities are in the red, but the losses are fairly contained compared to the decline yesterday in the US and in Europe. The Chinese manufacturing PMI rose to 51.7, supporting the thesis that the slowdown in the sector is bottoming out. The dollar is still trading within reach of the recent highs, but there are no follow-through gains yet. It is up to the US payrolls to decide whether a new up-leg can start.

Later today, calendar contains the final EMU manufacturing PMI’s. The preliminary reading showed a sluggish momentum in the sector, especially in Germany and France (the performance of domestic oriented services sector was better). We expect this trend to be confirmed in the final figure. The impact on the euro should be limited, maybe marginally negative. However, the focus is on the dollar side for the story.

A long series of eco data will be published in the US, but all eyes be on the payrolls and, to a lesser extent on the ISM of the manufacturing sector. The consensus expects decent payrolls growth at 230 000. The (currency) market will also keep a very close eye at the earnings. Yesterday’s market reaction after the Employment cost index illustrates wage growth is becoming a very sensitive item. We see risks for above consensus payrolls growth. However, the earnings data will probably be key whether the dollar starts a new up-leg (also keep an eye at the PCE deflators!). There is a decent chance that dollar will get additional interest rate support. Even in case of in line figures, the downside of the dollar should be reasonably well protected. A strong US ISM might reinforce such a move. EUR/USD should be most sensitive to USD supportive data. For USD/JPY the picture is a bit more mixed as higher yields tend to weigh on equities. However the link between USD/JPY and (US) equities unrivalled of late. Interest rate differentials rather than equities are becoming the driver for USD/JPY trading.

In a longer term perspective, the gradual rise of the dollar against the euro will stay intact. Last week, EUR/USD dropped below the 1.3503/1.3477 support even without a clear trigger, at that time. The move fits our long term view and the pair stayed well below this level over the previous days. Even so, we stayed a bit cautious and looked out whether the recent strength of the dollar would ‘survive’ the Fed policy announcement and the key US data that will be published this week. After the data/events yesterday and on Wednesday a poor payrolls report is needed to undo the break below the 1.3503/1.3477 support. This is not our preferred scenario. A more pronounced correction (EUR/USD rebound) is still an opportunity to add EUR/USD short exposure. The EUR/USD downtrend remains intact as long as the pair holds below the 1.3651/1.3700 area, while 1.3296 is the next short-term target, with the 2013 September low at 1.3105.

Cable sell-off continues

Yesterday, the early morning UK data were (GFK consumer confidence & Nationwide house prices) were slightly weaker than expected. Initially, there was no noticeable reaction of sterling, but sterling lost modest ground later in the session. Central bank month end buying was mentioned as a factor for the rise of EUR/GBP. The above-mentioned eco data probably inspired some profit taking on sterling longs, too. EUR/GBP spiked temporary to the 0.7940 area. The pair found a new short-term equilibrium in the 0.7930 area for the remainder of the session. Cable was again hit hard. The correction in sterling went hand in hand with ongoing USD strength. Cable dropped to the 1.6960 area.

Today, the UK manufacturing PMI is expected little changed at a high level (57.5 vs 57.2). We don’t have strong evidence to take a different view from the consensus. In case of a weak figure, sterling might fall prey to some further profit taking. Especially the technical picture in cable is vulnerable.

Recently, EUR/GBP stayed near the cycle lows and it even set a minor new low early last week. The UK news has been a bit more mixed recently, but the damage on sterling (against the euro) remained contained. Short-term, there is room for consolidation of sterling against the euro. Even so, overall euro weakness may hamper a substantial decline of sterling against the euro. So, there is no reason to go against the trend. We maintain our LT bullish view on sterling with EUR/GBP 0.7755 as a target. However, to set up new long sterling positions we maintain a sell-on-upticks tactic for EUR/GBP.