EUR/GBP tests 0.79 barrier on ECB QE speculation

EUR/USD declines, but US CPI looms

Yesterday, markets prepared for more directionless trading in the major USD cross rates. The calendar was thin. Global sentiment on risk was fragile and weighed on the US dollar. However, European markets were surprised by rumours that the ECB is looking to buy corporate bonds. This potential new step of monetary easing supported risky assets in Europe and EUR/USD tumbled well below the 1.28 handle. The impact on USD/JPY was more limited, but the risk-on sentiment and higher core bond yields pushed the pair higher in the 106 big figure.

Overnight. Asian equities profit from the impressive rally in the US yesterday evening. USD/JPY had a decent run yesterday, but the pair still struggles to regain the 107 handle and there are no additional gains this morning. Japanese trade data were mixed as exports and imports were both higher than expected. EUR/USD is holding in the 1.2725 area. The correction low at 1.2706 was almost tested, but a break didn’t occur, yet.

Today, there are no data in Europe. Investors will continue to contemplate the chances for more ECB easing after yesterday’s rumours on potential ECB corporate bond buying. This issue might protect to the topside in EUR/USD. However, the focus will turn to the US and the US CPI release. The (fear for) too low inflation has become a key factor for monetary policy worldwide.
The issue is still less demanding in the US, but a further decline in inflation might fuel speculation that the Fed policy normalisation might go slower than anticipated.
CPI is expected to decline from 1.7% to 1.6%, but there are downside risks. If so, it will be a negative for the dollar. USD/JPY is most vulnerable to such a scenario, but EUR/USD will also be affected. In this scenario of below consensus US inflation, more downside in EUR/USD below 1.27 might be difficult short-term. Even so, the ‘war of easy monetary policy’ between the ECB, the Fed (and others), probably will keep a sustained break of EUR/USD above 1.2886 difficult. Over the previous days EUR/USD jumped directionless up and down between 1.26/1.29 . This may continue. Further out, we will keep an eye at the US activity data. If the stay strong, the dollar finally should take the lead again.

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 over the last two weeks 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 tests 0.79 barrier on ECB QE speculation

Yesterday, EUR/GBP trading showed two faces. After a strong performance of sterling over the previous days, EUR/GBP drifted higher early in European dealings. However, the rumours on potential ECB corporate bond buying were also a game changer for EUR/GBP trading. The pair dropped from the 0.7940 area to levels below 0.7900. The swings in cable were much more limited than in EUR/USD or in EUR/GBP. Cable came off the intraday highs in the 1.6184 area and settled temporary in the mid 1.61 area. Late session dollar strength finally pushed the pair back to the 1.6120 area.

Today, there are no UK eco data, but markets will keep a close eye on the October BoE Minutes. The recent decline of inflation and ongoing low wage growth give the BoE room to stay longer in a wait-and-see mode. So, we expect the minutes to be soft. However, the BOE will probably wait for November inflation report to eventually amend their view/guidance on monetary policy going forward. The Minutes might be slightly negative for sterling.