EUR/GBP downtrend shows signs of fatigue

EUR/USD decline slows

Yesterday, trading in the major currency cross rates was driven by conflicting signals. The data in both the US and Europe were supportive for the local currency. USD/JPY was the outright winner and returned to the 108 area. The decline in EUR/USD slowed as the EMU PMI’s were better than expected. At the same time, the dollar was resilient, too. The US data were OK and the rise in equities and yields was (slightly) supportive, too. EUR/USD settled in the 1.2650 area.

Overnight, sentiment on risk turned more cautious as a doctor tested positive for Ebola in New York. An official report in China showed that property prices declined in 69 of the 70 cities monitored in the survey. Asian equities trade mixed. Japan outperforms on yesterday’s rebound in USD/JPY even as the pair is off the highs. It returned to the 108 area. EUR/USD trades stable in the 1.2650 area.

Today, the calendar is thin with only second tier eco data scheduled for release in the EMU. The UK GDP (expected at 0.7% Q/Q) might have some impact on sentiment in Europe. A weaker than expected figure might suggest more dismal news from the region. However, we don’t expect a big fall out on the euro. In the US, new home sales are expected to decline 6.8% M/M after a spectacular rise of 18.0% the previous month. Currency markets probably won’t draw firm conclusions from such a volatile figure.
So, global sentiment on risk, Ebola fears and anticipation on the outcome of the ECB AQR/stress test will set probably set the tone for trading. Going into the start of trading in Europe, sentiment on risk is turning less optimistic and bond yields are slightly lower. This might be a slightly negative for the dollar, especially for USD/JPY. The AQR is some kind of a binary risk from a market point of view. We think that the outcome of the process should be positive over time. However, it is difficult/useless to preposition for the event, especially in the currency market.

To conclude. We start the day with a cautious bias for USD/JPY. For EUR/USD more sideways trading in the 1.26 big figure might be on the cards. In a longer term perspective, we maintain a sell on upticks approach. However, some more consolidation might be on the cards going into next week’s Fed meeting.

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 downtrend shows signs of fatigue

Yesterday, EUR/GBP was affected by conflicting signals. A better than expected EMU PMI and poor UK retail sales propelled EUR/GBP to the 0.7915 area early in the session. However, the pair returned most of the early gains as EUR/USD reversed the post-PMI rebound later in the session. This move dragged EUR/GBP lower, too. Cable dropped temporary lower after the UK retail sales. The 1.60 barrier was under test, but the test was rejected.

Today, the first estimate of the Q3 UK GDP will be published. The consensus expects again good growth at 0.7% Q/Q and 3.0% Y/Y. We see some downside risks . If it materialises, so, it would be negative for sterling. Less buoyant growth will be important input for the November BoE meeting.

Of late, we had a sell-on upticks approach for EUR/GBP. We maintain the view that the trend in EUR/GBP stays downward longer term. Short-term, the trend shows some signs of fatigue. The 0.7850/0.7755 is a tough support short-term. We take a more neutral approach on the EUR/GBP cross rate short-term.