EUR/USD drifting lower in the range

Yesterday, the euro remained under pressure as the debate on ECB corporate bond buying continued. Rumours that at least eleven banks failed for the ECB stress test (AQR) added to the euro negative sentiment. Later in the session, USD momentum improved as the US CPI was slightly higher than expected.US equities gave up early gains and closed with moderate losses. Remarkably, this correction had hardly any negative impact on the dollar. USD/JPY closed the session at 107.14; EUR/USD at 1.2650, within reach of the intraday low.

Overnight. Asian equities are in the red, but the losses are limited compared to the correction in the US yesterday. The terrorist attack in Canada might be a factor of uncertainty for the US/western equity markets, but is apparently less of an issue for Asia. The Japanese manufacturing PMI rose from 51.7 to 52.8. The Chinese HSBC manufacturing PMI rose to 50.4, also slightly better than expected. Today, Japanese three month government bills were sold for the time at a negative yield. This can be seen as an illustration of the different monetary policy stance between Japan (and the EMU) on the one hand and the US on the other hand. In theory, this can be considered as USD supportive.

Today, the advance EMU PMU will be published. Over the previous months, the PMI’s indicated an ongoing loss of momentum in the EMU economy. The consensus expects a further decline, both for the manufacturing and the services measure. Manufacturing is even expected to drift into contraction territory. The consensus expectation already discounts a rather poor scenario, but we see little room for a positive surprise. So, the PMI’s might be an additional negative for the euro. There will probably also be a lot of market chatter on the outcome of the AQR (leaks?). It will be all speculation, but the issue remains a factor of uncertainty for the euro. In the US, the Chicago Fed national activity index, the jobless claims, the Markit manufacturing PMI and the leading indicators will be published. These data are not the most important ones. Even so, with the CPI out of the way, we look out whether decent US activity data can support the dollar further.

The performance of the equity markets is a wild card for USD trading. Yesterday, the dollar resisted the stock market correction quite well. We look out whether this resilience persists. Yesterday’s decline in EUR/USD was quite substantial especially as there was not that much of hard news. We don’t see a trigger for a reversal at this stage, but a further decline of the euro/rise of the dollar probably needs some more hard news. A cautious USD positive bias is preferred. (Sell EUR/USD on upticks)

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 becomes 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 declines on global euro weakness

Yesterday, sterling lost temporary ground against the euro as investors anticipated on soft BoE minutes. EUR/GBP returned north of 0.79.The tone of the minutes was soft, but more or less as expected. EUR/GBP initially gained a few ticks after the minutes and touched an intraday top in the 0.7925 area.
However, euro weakness prevailed and the post CPI decline of EUR/USD pushed EUR/GBP also back below the 0.79 level. Cable was hit much harder and dropped temporary to the low 1.60 area after the publication of the minutes. Despite ongoing USD strength, the pair recouped some loss later and closed the session at 1.6050.

Today, the UK retail sales, BBA loans for home purchases and the CBI industrial trends survey will be published. The retail sales have most market moving potential. A stabilisation/slight decline on a monthly basis is expected. We consider the consensus expectation as rather conservative. So, a positive surprise is possible. If so, it might give sterling some additional support. Of course, for EUR/GBP trading ongoing euro weakness might be at least as important as a driver for trading, rather than sterling strength. In line with EUR/USD, we cautiously negative bias for EUR/GBP. 0.7850 is the first intermediate support. The range bottom at 0.7767/55.