US data inspire USD profit taking

Yesterday’s price action in EUR/USD and USD/JPY was quite similar to Tuesday’s. During the morning session EUR/USD was little changed even as both European bonds and equities performed rather well. In the afternoon, the dollar ceded ground as most US eco data were reported below consensus.

Overnight, Asian equities trade mixed. Japanese equities are drifting slightly off the highs as USD/JPY is drifting lower, too. USD/JPY is trading in the 117.30 area after yesterday’s disappointing US data. Chinese equities continue to outperform. The PBOC of China didn’t drain funds from the money market for the first time in four months. This is seen as another sign of monetary easing The Aussie dollar rebounds on better than expected capital spending data after setting a four year low against the dollar yesterday. EUR/USD is struggling to stay north of 1.25 as the pair jumped higher after yesterday’s disappointing US data. Brent crude oil is setting new lows in the $76.50 per barrel area. For now the decline of oil is no help for the dollar, on the contrary.

Today, the US markets are closed for Thanksgiving, but there are several interesting releases on the agenda in Europe, with EC confidence data, German labour data and the first estimate of the German November CPI. Most European confidence indicators of late signalled a struggling EMU recovery. Even in case of a slight upward surprise the confidence indicators wouldn’t change this global assessment of a fragile rebound. German labour market data are expected to signal a stabilisation, too. The focus will be on the German CPI inflation. The HICP is expected to decline from 0.7% Y/Y to 0.5% Y/Y. Part of this decline is energy driven, but it won’t mute calls to take further action to fight too low inflation. We see even a risk for a below consensus figure (0.4% Y/Y). In global we expected the EMU/German data to be neutral to slightly negative for the euro. Regarding ECB speakers, ECB Draghi speaks in Helsinki. His view on more monetary easing is already very clear. Will he still step up its rhetoric? It might be at least as interesting to keep an eye at an appearance of ECB Weidmann. Has he something to say on the recent ‘ECB commitment’ for more easing? All in all we assume more sideways trading for EUR/USD in thin market conditions. A negative German inflation surprise might cap the topside of the euro. At the same time, USD/JPY is losing some momentum short-term. Recently any dips were soon used to buy. We would be surprised if the next correction has some further to go before bottom fishers step in again.

Broader view. For EUR/USD some further consolidation within the EUR/USD 1.2358/1.2600 range might be on the cards. Over the previous days we already indicated that a swift break lower in EUR/USD wouldn’t be that easy, even in case if the data point in that direction. The price action yesterday and on Tuesday supports this feeling. The price move in USD/JPY looks a bit toppish too. So, even as the trend is USD positive longer term, it looks that the market is not ripe for a further upleg at this stage. Next week’s early month US eco data might decide whether there is room for a new USD upleg going into the end of the year.

Sterling profits from good Q3 domestic demand.

Recently any GBP moves were mostly driven by external factors rather than by UK news. This pattern changed yesterday. The UK Q3 GDP growth was confirmed at 0.7% Q/Q and 3.0% Y/Y, but domestic demand (including private consumption) was stronger than expected. Despite recent lethargy, the report triggered a nice rebound of sterling against the euro and the dollar. EUR/GBP dropped to the 0.79 area. Cable gained more than one big figure and tried to regain the 1.58 barrier. Part of the gains in cable were due to USD weakness after the US eco data. It will be interesting to see whether this is more than a one-off repositioning.

Today, the UK eco calendar is empty. Will there be any follow through price action on yesterday’s sterling rebound? To be honest, today’s low volume trading is not the most evident context to adapt positions. The end of month context is usually a positive for EUR/GBP, too. So we don’t expect any clear directional move today.

Until yesterday, we were bit surprised on the EUR/GBP resilience despite ongoing soft ECB talk and decent UK eco data. Yesterday, EUR/GBP finally turned south again. The rebound in cable suggests a better bid for sterling too. That said, the technical picture of EUR/GBP hasn’t changed. We maintain a cautious sell-on upticks strategy in the 0.8066/0.7755 trading range.