EUR/USD not affected by rising tension on Ukraine

On Tuesday, EUR/USD and most other major USD cross rates traded remarkably calm given the nervous swings on the equity markets. Uncertainty on Ukraine was an important factor for equity volatility. However, it left hardly in traces on EUR/USD. The pair closed the session little changed at 1.3815. The same applies to USD/JPY (close at 101.92).

Overnight, Chinese growth was reported at 7.4% Y/Y (from 7.7% Y/Y). The consensus was at 7.3%.Asian equity investors look happy with the report. It suggests that the Chinese economy is heading for a soft landing and keeps the door open for selective additional stimulus from Chinese authorities. Japanese equities outperform (speculation on additional equity buying from Japanese pension funds?). USD/JPY in lockstep regained the 102 barrier. EUR/USD is again remarkably stable in the 1.3815/25 area.

Today, the final EMU April inflation figure is expected to confirm the preliminary reading of 0.5%. There is a small risk for a downward revision to 0.4%. This is not our preferred scenario, but if so, it would put additional pressure on the ECB to take action and it would weigh on the euro, too. In the US, the housing starts & permits and the US production data will be published.
Those reports are no so important ones for USD trading. We see slight downside risks. Later today, several Fed governorswill speak, including president Yellen.
The Fed will also release the Beige book, preparing the next Fed meeting.
Markets will look for clues on the pace of the US recovery and what it means for the timing of a first Fed rate hike (mid 2015?). Of late, the dollar failed to profit from decent news from the US (cf. this week’s good retail sales). With Ukraine less prominent on the headlines this morning, there is no obvious trigger for a further decline in EUR/USD right now.

Of late, we advocated that it will be difficult for EUR/USD to rally sustainably beyond 1.40. This working hypothesis was under stress of late, but is still valid. The 1.3906/67 area looks like a tough resistance. To be honest, the negative impact of Ukraine on the euro was limited, too. Caution remains warranted, but a guarded sell‐on‐upticks strategy can be reconsidered. USD/JPY is off the recent lows, but for this cross rate the picture remains fragile as long as global equities don’t find a more solid bottom. For a sustained rally of the dollar (both against the euro and the yen), the US currency needs more interest rate support. In this respect, the recent core bond market movements weren’t dollar supportive. For now, there is no indication that this context will change anytime soon.

Will UK labour market data support sterling further?

On Tuesday cable came under pressure from the start of trading in Europe and the pair spiked below the 1.67 barrier. In this move EUR/GBP jumped temporary higher, too. The UK inflation data were close to expectations. At the same time, the ONS February house prices showed a strong rise of 9.1 Y/Y. Sterling reversed earlier losses against the dollar and the euro. Both cable and EUR/GBP were little changed in a daily perspective.

This morning, the euro is better bid across the board. EUR/GBP is gaining a few ticks, too. Later today, markets will keep a close eye on the UK labour market data. Over the previous months, strong UK labour market data often kick‐started a ST rally of sterling. We keep a close eye at the wage increases. A rise in average wages would suggest that the spare capacity in the labour market (and in the broader economy) is declining. In this context, the case for reducing policy stimulation strengthens. Of course, the EMU inflation report (0.5% or 0.4%) remains a wildcard for EUR/GBP trading, too.

Of late, the technical picture in the major sterling cross rates was mixed. Cable recently rebounded off the 1.6460 low and the 1.6823 cyclical top was almost reached last week. For now, this proves a too high hurdle, even as the dollar remains fragile across the board. We maintain our view that the top won’t be easy to break in a sustainable way, but broad dollar weakness might spoil the game. EUR/GBP drifted to the 0.8230 area early last week, but a real test of the 0.8200/0.8157 support area didn’t occur. The sterling momentum is constructive, but a break will probably be difficult as long as the euro remains well bid across the board. We keep a sell‐on‐upticks bias for EUR/GBP.