EUR/USD sets new correction low

Yesterday, the ‘euro sell’-off following Draghi’s soft comments at the Jackson Hole symposium initially slowed. There was no high profile news in Europe and US data were not strong enough to trigger further USD gains against the euro. Even so, EUR/USD failed to move away from the correction low. What can’t go up, must come down. After the close of the European markets, EUR/USD made another downleg. USD/JPY had a rather calm trading session and hovered near the 104 pivot.

Overnight, most Asian equities show moderate gains in line with the US. For now, the positive equity sentiment has no big impact on US bond yields. This lack of additional interest rate support is keeping USD/JPY in the 104 area. EUR/USD is holding near the trend low recorded this morning (1.3153).

Later today, the EMU calendar is very thin. Markets will keep an eye at the French confidence indicators. A negative report might be slightly negative for the euro. In the US only the mortgage applications scheduled for release. The talks between Ukraine president Poroshenko and Russia’s Vladimir Putin didn’t yield a concrete result, but for now the issue is moving to the background. So, there is no obvious driver for currency trading. Geopolitical tensions are further easing (cf. Gaza). Together with expectations for policy easing in Europe, this might be a positive factor for European (and to a lesser extent for global) equities. Over the previous days, this context proved to be moderately EUR/USD negative. If the ongoing equity rally would cause a moderate rise in US yields, this could continue to support the bid for the dollar, but one shouldn’t give too much weight to this factor. The bottom line is that a firm EUR/USD downtrend is place, but that the pair is technically moving into oversold territory. In this context, a sell-on-upticks strategy is preferred, but the upticks were very limited until now. For now, there is no reason to row against the standing EUR/USD downtrend.

In a longer term perspective, the rise of the dollar against the euro stays intact. Last week, 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 the 1.3345 area.

Cable decline slows, but no clear new trend yet

Yesterday, UK traders returned from the summer bank holiday. In thin market conditions, sterling performed rather well against the euro and the dollar. However, there was little news in the UK to inspire directional trading in sterling. Only the BBA loans for home purchases were on the agenda. The expected rebound in the number of loans didn’t occur, but the impact on sterling trading was limited and very short-lived. EUR/GBP settled in the 0.7955/70 area. During the US trading session, cable again slightly outperformed, keeping EUR/GBP near the recent lows.

Today, the calendar in the EMU is thin and there are also no data on the agenda in the UK. So, technical factors will prevail. Over the previous days, there were tentative signs that the sell-off of cable was slowing and that sterling tried a cautious comeback against the euro. We look out whether that pattern can be extended today.

In August, sterling fell prey to profit taking, as the UK data turned a bit mixed. Especially ongoing low wage growth helped BoE’s Carney to fend off calls for early rate action. At the same time, the BoE minutes showed that two members voted for a rate hike in August. EUR/GBP settled in a 0.7875/0.8035 consolidation range. The sell-off in cable is in the first place due to dollar strength. EUR/GBP touched a correction top in the 0.8035 area mid-August, but global euro weakness prevented a further rise. We assume that this area is now a new strong resistance for the EUR/GBP cross rate. We reinstall a sell-onupticks approach. The 2014 low (0.7874) is the first important support. We maintain our LT bearish view on the euro with EUR/GBP 0.7755 as a target.