On Tuesday, the dollar was strong across the board supported by rising US yields. However both EUR/USD and USD/JPY didn’t move beyond key resistances. Even a strong US manufacturing ISM failed to do so. The US currency still has to digest recent gains ahead of key events later this week. USD/JPY outperforms as the pair settled north of the 105 mark.
Overnight, the Chinese non-manufacturing/services PMI’s came out much stronger than expected. Chinese and most other Asian equities show nice gains. Japanese equities profit from the rise in USD/JPY. The pair is holding north of 105.00. EUR/USD remains in wait-and-see mode, but is still trading within reach of the 1.3105 key support. The Australian Q2 GDP was close to expectations at 0.5% Q/Q and 3.1% Y/Y. The Aussie dollar is little changed in the high 0.92 area.
Later today, the calendar is modestly interesting. In the EMU, we look out for the final reading of the EMU services PMI and for the details from the member states. The preliminary services index dropped from 54.2 to 53.5. A slight further negative revision might be on the cards. A limited downward revision won’t have a big impact on EUR/USD as (currency) markets recently already discounted EMU eco weakness and additional ECB easing. Even so, a poor figure will keep the pressure on the ECB to act and cap the topside in EUR/USD. Later this morning the EMU retail sales are expected at a meagre -0.3% M/M and 0.9% Y/Y. The report is too outdated to have a big impact on EUR/USD. In the US, only the factory orders and some second tier data are on the agenda. We expect no big impact of them ahead of the key events and data later this week. Yesterday, core bond yields rose quite sharply and yield differentials moved further in favour of the dollar, both at the short end and at the long end of the curve. This helped in the first place USD/JPY. The decline in EUR/USD slowed. Ukraine remains a factor of underlying uncertainty, but of now its direct impact on markets is fading. So, EUR/USD traders could face another ‘transitionary’ session ahead of the key data and events. If core bonds would rise, it would support the dollar (especially USD/JPY) going into the key US data.
From a technical point of view, the dollar is near key technical resistance levels against the euro and the yen. EUR/USD is close to the 1.3105 level (Sept 2013 low), while USD/JPY is nearing the 105.44 January top. A break beyond would be significant for the broader picture of the US currency. EUR/USD is in oversold territory, but this didn’t prevent a gradual further decline of late. In a longer term perspective, the EUR/USD downtrend stays intact. 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. The EUR/USD downtrend remains intact as long as the pair holds below 1.3345.
EUR/GBP decline slows
On Tuesday, a new theme came in the spotlights as a potential driver for sterling trading. An opinion poll in the UK showed a strong increase of support for Scottish independence at the September 18 referendum. According to the poll, 47% of the respondents said to vote for independence. A vote for Scottish independence would create a lot of political and economic uncertainty in the UK. The role of sterling in the new context is also highly uncertain. Sterling was hammered across the board. Cable set a new correction low, below 1.65. EUR/GBP rebounded to the 0.7975 area.
This morning, sterling is still near the recent low against both the dollar and euro. Later this morning, the UK services PMI will be published. A moderate decline from 59.1 to 58.5 expected. Earlier this week, the manufacturing PMI showed a much steeper than expected decline. A similar scenario for the services sector would be important is UK growth is highly depended on domestic demand. Services are an important factor in this context. After the flaring up of the referendum risk, we see somewhat of an asymmetrical risk for sterling. Poor data might trigger further sterling selling. A good figure might have less impact.
The uncertainty on the referendum after the recent opening poll also made us changing our short-term bias on sterling. There is a substantial risk that this issue will keep sterling investors side-lined till it is out of the way. In this context we change our ST bias on sterling to negative. The tentative signs of a bottoming out in sterling (or even a rebound) will probably not materialize in the near future. We remove our sell-on-upticks bias for EUR/GBP. Stop loss protection on GBP-longs is warranted (both against the dollar and the euro).
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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