UK labour market data push sterling higher

EUR/USD in listless sideways trading mode

On Wednesday, EUR/USD and USD/JPY had a sideways oriented trading session.. EUR/USD initially gained some ground despite increased geopolitical tensions (Ukraine), but gave the gains back during the US session, closing at 1.3815, exactly the same as on Tuesday night. At the same time, USD/JPY drifted north of 102 during the Asian session, before sliding in a tight trading range during EMU and US trading. Ultimately, the pair closed at 102.23, up from 101.92.

Overnight, the dollar weakens a bit against euro and yen. Asian stocks trade listless, just above yesterday’s close ,ignoring WS’s strong run. The US corporate news (Google, IBM…) was weak. Yellen’s speech was quite dovish, but nothing very exciting in it. The Beige Book was unexciting too. The BOJ regional report confirmed that 8 of 9 region are growing at unchanged pace, while one region recorded upward revisions. Some unwinding of dollar longs ahead of the long weekend may have put the dollar under slight downward pressure in Asia.

Today, the European calendar is devoid of important releases. The price action of the recent days suggests that very strong US eco data are needed to widen the US/EMU interest rate differential and to trigger substantial dollar gains. It is unlikely that the initial claims or the Philly Fed survey, will do the trick. The former are likely distorted due to the late timing of Easter, while the expectations for the latter are already high. Global currency markets will also keep an eye at the corporate earnings and at the developments in Ukraine. Regarding the latter EU, US, Ukraine and Russia hold talks in Geneva. If it leads to some de‐escalation it might be a positive for the euro. Good corporate news and higher bond yields should in theory support the dollar, but there is little reason to bet on these. Traders will also be cautious as some other markets close early today and remain closed till Tuesday. Thinner than usual flows and the closure may affect short term positioning.

Of late, we advocated that it will be difficult for EUR/USD to rally sustainably beyond 1.40. This working hypothesis came under stress 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. There is no indication that this context will change soon.

UK labour market data push sterling higher

On Wednesday, the UK labour market report showed further improvement in labour conditions. The unemployment rate declined from 7.2% to 6.9% and employment grew much faster than expected. Wage growth missed the consensus estimate though. Even so, the report suggest that the slack in the UK labour market continues to decline. Sterling jumped higher against the dollar and the euro. Cable came within reach of the 1.6823 cycle top, but a break again didn’t occur. EUR/GBP dropped to the 0.8240 after the release and kept strengthening later on to close around 0.8225.

Overnight, EUR/GBP traded near yesterday’s closing levels. We saw no new info arising. UK markets are closed tomorrow and on Monday. Later today, there are no data on the agenda in the UK and no important ones in Europe. So, technical trading and positioning ahead of the long weekend will dominate trading in EUR/GBP and for cable. In this context sideways trading looks most likely today, maybe with some profit taking on recent sterling gains. Cable is still flirting with cycle highs.

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 is reached.
Ahead of the long weekend, this might be a too high hurdle, even as the dollar remains fragile across the board, unless big pockets use the thinness of markets to force a break. We maintain our view that the top won’t be easy to break in a sustainable way. 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.