Dollar recovery stays rather disappointing

Friday, global markets tried to leave the risk-off trade behind. The equities rebounded and peripheral spreads tightened. However, the dollar could only modestly gain from the renewed risk-on sentiment. EUR/USD finally dropped to 1.2744 in mid-US session, but the dollar couldn’t really gain momentum and the pair closed at 1.2760, a 50 pips daily gain. The dollar didn’t perform better against the yen and closed the session at 106.88, up from 106.33 on Thursday and from the 105.23 bottom on Wednesday. The trigger for the correction on the riskier markets were comments of Coeuré, who said the ECB will start asset purchases in the next days and repeated that the ECB was ready to take additional measures, if needed. Nothing really new, but following the sharp equity losses in past days, there was room for buying after the risk off correction. Similarly, Fed Rosengren supported the market with comments.

Overnight, the dollar keeps a sideways trading profile versus the euro, while it gains on the yen with USD/JPY changing hands above the 107 handle. Japanese equities go ballistic (up 4%). PM Abe suggested he may delay the sales tax hike. There is also a report about an increase of the allocation target of equities in the pension funds. Other Asian equities move higher too, but the gains are contained (moderate). The dollar should continue to outperform the yen if the risk-on continues, but against the euro its ascend may be more difficult after the FED funds path has been substantially revised lower last week. Against the euro the dollar needs more interest rate support.

Today, economic data are few and irrelevant for trading. The event calendar is unenticing too with another speech of Coeure the sole point of interest. As Coeure spoke as recently as Friday, we assume he won’t give us new insights. Some European firms report their results this morning, while a few US bellwethers report after closure. So, FX trading will be driven by the overall sentiment of risk. Equities jumped higher in the US and Europe on Friday (and Asian stocks overnight). So, the question will be whether the risk recovery has more legs. We remain cautious as main indices haven’t regained key support levels that were lost in last week’s sell-off. Given some key releases in the next days like Chinese GDP Tuesday, US CPI Wednesday, EMU/Chinese PMI’s Thursday, AQR results Sunday and the FOMC next week, we go for a quiet Monday session with sideways trading in EUR/USD. If equities would do well, the dollar may gain some ground, but most likely technically irrelevant.

The technical picture of EUR/USD deteriorated after the break below the key 1.2662 support level (Nov 2012 low). We have a LT negative bias on EUR/USD. The trend is intact, but the price action since the middle of last week suggests that the market was too long USD. In the meantime, dollar overbought conditions have been worked off. The 1.2043/1.1877 support is the next LT target, but a drop below 1.25 is needed before the picture should be again dollar bullish ST. A re-break above 1.2995 would be really significant and suggest a real loss of momentum in the longstanding EUR/USD downtrend. This is not our preferred scenario though.

EUR/GBP returns below 0.80

On Friday, there were no important eco data in the UK and EUR/USD entered calmer waters, too. EUR/GBP settled in a tight range mostly just north of 0.7950. BoE Haldane gave some mixed comments on monetary policy. He acknowledged the gloomier outlook, but at the same time indicated that a mid-2015 rate hike was perhaps not a bad bet by markets. Sterling hardly reacted to the comments. In the afternoon trade EUR/GBP lost ground in line with the main EUR/USD cross. Finally, EUR/GBP closed at 0.7928, down from 0.7962 on Thursday eve. So, the venture above 0.80 was short-lived, and the inability to test even the 0.8066 resistance makes that level a stronger resistance. Cable was little changed at 1.6093.

Overnight, Rightmove October house prices were reported at 2.6% M/M and 7.6% Y/Y, slightly down from the 7.9% Y/Y increase in September. The release was ignored. A slowing in house prices might keep the BOE longer on the sidelines and thus is sterling negative. However, it is currently not the driver for trading. Sentiment on sterling improved or maybe more correctly, sentiment on the euro weakened recently (risk-on correction). With no UK and, more important, EMU data on the calendar we expect EUR/GBP to follow the overall euro sentiment. This means some slight further sterling gains are possible.
Overall though, sideways trading may prevail, awaiting key eco data (PMI’s) Thursday and the Minutes of the BoE meeting Wednesday. The EUR/GBP 0.7755/0.8066 consolidation range looks well in place. We look to sell into strength for return action lower in this range.