EUR/GBP testing short-term correction low

Ukraine weighs on EUR/USD but no new correction low

Yesterday, there were tentative signs that the decline of European bond yields and of the euro were ready for a pause. However, the calm didn’t last long as violence at the Russian/Ukraine boarder flared up, putting (currency) markets in risk-off mode. EUR/USD dropped back below 1.32 and the yen gained, albeit moderately, against the euro and the dollar.

Overnight, the losses on the US and Asian markets are moderate, despite ongoing crisis in Ukraine. The risk-off trade applies in the first place to the European markets. Japanese inflation data were close to expectations, but spending/activity numbers were rather weak. This is keeping pressure on the BoJ to consider further easing. This probably helped to prevent a bigger rise of the yen in the wake of the Ukrainian crisis. USD/JPY is holding relatively stable in the 103.75 area. EUR/USD has found some kind of a short-term equilibrium in the 1.3175 area. Later today the focus in Europe remains on the EMU inflation. The EMU August CPI estimate is expected to decline from 0.4%Y/Y to 0.3% Y/Y.
Yesterday’s Germany inflation deduced the chance for an even sharper drop. Of course, the 0.3%Y/Y perfectly fits the definition of too low inflation, but from a market point of view, we don’t expect sharp further decline in bond yields or in the euro if the consensus is met. A 0.2% release could reinforce QE speculation but this is not our favourite scenario.. EMU labour market data are mostly of no importance for currency trading. In the US, the income and spending data, the Chicago PMI and the Final Michigan consumer confidence will be published. There might be some slight upside risks for the Chicago PMI and the Michigan confidence. However, even in such a scenario we expect only a limited impact on the major USD cross rates. US traders are heading for a long weekend. Investors are probably inclined to avoid risk, while it is not sure that this will help the dollar much. Aside from the data, there will still be plenty of headlines from Ukraine. For now, the reaction from the West remains rather moderate. New ‘hard sanctions’ would be a negative for the EMU and could weigh on the euro. However, the question is whether Europe is prepared to play the game really hard. In this respect, we look to the meeting of EU ministers today and tomorrow. For now we have the feeling that the rhetoric and sanctions won’t be extremely tough. The euro remains vulnerable, but if there is no further escalation, a new sharp downleg beyond the recent low (1.3153) is no done thing in the short term.

To conclude: the medium term economic and monetary fundamentals point to a weaker euro and a stronger dollar over time. The Ukrainian crisis is in theory also a negative for the euro. Even so, we stay a bit cautious on the EUR/USD downtrend in a day-to-day perspective as the pair is in oversold territory. The fact that EUR/USD failed to set a new correction low despite the Ukrainian crisis, illustrates this view.

In a longer term perspective, the EUR/USD downtrend stays intact. Last week, EUR/USD dropped below the 1.3296 support, opening the way to the 1.3105 target (Sept 2013 low). 1.2755/1.2662 is key longer term. A more pronounced correction (EUR/USD rebound) is still an opportunity to add EUR/USD short exposure, but we are in no hurry to do so at the current levels. The EUR/USD downtrend remains intact as long as the pair holds below the 1.3345 area.

EUR/GBP testing short-term correction low

Yesterday, there were was again no clear driver in sterling trading, as the focus on global markets was on Ukraine. The CBI distributive trades (published at noon) were better than expected, but had not distinct lasting impact on sterling trading. At that time the market was flooded with headlines on the developments at the Russian/Ukraine border. EUR/GBP lost a few ticks in line with the broader euro decline on Ukraine, but the decline stayed limited. Cable retried to move north of 1.66, but the decline in EUR/USD pushed also cable back below the 1.66 mark.
Overnight, UK GFK consumer confidence improved more than expected and the nationwide house prices were also stronger than expected. (0.8% M/M; 11.0% Y/Y). For now, the reaction of sterling is moderate, but good eco data should help the tentative bottoming out of sterling. Later today, there are no eco data anymore in the UK. The day-to-day momentum for sterling against the euro looks positive (negative EUR/GBP) For cable the picture remains more diffuse.

In August, sterling fell prey to profit taking, as the UK data turned a bit mixed. Especially ongoing low wage growth helped BoE’s Carney to fend off calls for early rate action. At the same time, the BoE minutes showed that two members voted for a rate hike in August. EUR/GBP settled in a 0.7875/0.8035 consolidation range. The sell-off in cable was in first place due to dollar strength. EUR/GBP touched a correction top in the 0.8035 area mid-August, but global euro weakness prevented a further rise. We assume that this area is now a new strong resistance for the EUR/GBP cross rate. We reinstall a sell-on-upticks approach. The 2014 low (0.7874) is the first important support. We maintain our LT bearish view on the euro with EUR/GBP 0.7755 as a target.