EUR/GBP still at 0.80 despite less dovish BoE minutes

Fed minutes fail to give any guidance for USD trading

Yesterday, interest rate markets were captured by a repositioning ahead of the FOMC minutes and today’s EMU PMI’s data. USD/JPY and EUR/JPY continued to march higher. The picture for EUR/USD was indecisive as the pair held north of 1.25. The dollar spiked temporary lower upon the publication of the Fed minutes. Markets reacted to some soft headlines of declining inflation expectations. However, a more in depth reading showed very divergent opinions within the FOMC on how policy normalisation should continue and on how to communicate this to the market. The dust settled soon. EUR/USD returned the mid 1.25 area. USD/JPY resumed its uptrend and gained yet another big figure (118).

Overnight, the HSBC China manufacturing PMI dropped more than expected to exactly 50 from 50.4. So, the impact of the policy of targeted stimulus looks to be waning. The impact on Asian markets is moderate and mixed. Japanese exports rebounded sharply in October. Most Asian equity indices show marginal gains. The yen cross rates (USD/JPY, EUR/JPY ….) extend their (impressive) rally. USD/JPY is seen well above 118. EUR/JPY is changing hands in the high 148 area! EUR/USD is little changed. The post-Minutes’ spike to the 1.26 area was soon reversed. The pair is again in well-known territory in the mid 1.25 area.

Today, the eco calendar contains plenty of interesting data releases. In Europe, the PMI’s and consumer confidence for the EC will be published. A marginal rise is expected both for the manufacturing measure (from 50.6 to 50.8) and the services’ index (52.3 to 52.4). Will recent tentative signs of a better momentum in European economy be confirmed? If so, it might support the euro short-term. In the US the calendar is also very interesting with the CPI, the initial jobless claims, the Philly Fed business outlook and the leading indicator. We expected activity data (claims and Philly Fed) to confirm a reasonably strong momentum in the US economy. Markets will also be very attentive for any surprise in the CPI as the Fed showed highly indecisiveness in its reaction to declining inflation expectations. The consensus expects headline inflation slightly lower at 1.6%. The core reading is expected unchanged at 1.7%. We don’t have much reason to take a different view from consensus. We assume that markets are positioned for rather soft inflation data. However, for now we don’t feel inclined to preposition for an imminent rebound of the dollar against the euro. We want a clear signal first. For USD/JPY, there is no reason to blow against the wind even as several yen cross rates are moving into oversold territory.

Broader picture. The different policy stance between the US and Europe suggests more dollar gains against the euro further down the road. Draghi reinforced this view at the ECB press conference, but it was not enough to trigger a sustained EUR/USD downleg. From a technical point of view, the break below 1.25 opened the way to the 1.2043/1.1877 key support area (July 2012 low/Crisis low June 2010).We think that those levels are feasible. However, of late US rates and the dollar reacted very reticent to good news from the US. This suggests that there was/is still some time needed to digest the recent decline of EUR/USD. Look to sell into any more pronounced up-ticks.

USD/JPY spiked sharply higher after the BoJ policy decision and is reaching the highest level in 7-years. Technically there is no big hurdle anymore till the psychological 120 mark and the major LT 2007 top (124.11). These levels are far away, but USD/JPY might still have some way to go, both due to yen weakness and further USD strength. We have a LT USD/JPY positive bias. This week’s price action suggests that the downside in this cross rate is well protected as long as sentiment on risk remains constructive.

EUR/GBP still at 0.80 despite less dovish BoE minutes.

Yesterday, the BOE minutes painted a less soft picture compared to recent comments from BoE Carney. The two dissenters maintained their position and voted again for a 0.25 bps rate hike. Even within the majority there was ‘a material spread of views’. Some members of the majority did see risks that spare capacity could be eliminated more quickly than anticipated. Sterling gained ground against the euro and the dollar after the publication of the minutes. EUR/GBP returned temporary below 0.80. Cable touched the 1.57 big figure but is also off the highs. The correction is logic given the recent BoE talk and subsequent sterling selling. That said, we see yesterday’s reaction rather as a bit disappointing for sterling bulls.

Today, the UK retail sales and the CBI trends orders are on the agenda. Retails are expected to rebound in October after a poor September report. CBI orders are expected slight better at -5 from-6.

As said, we considered yesterday’s GBP rebound after the BoE minutes a slightly disappointing. The resilience for EUR/GBP might be partly due to euro strength. This factor might still be in play today (EMU PMI’s).Even so, we are keen to see the sterling reaction in case of strong UK eco data. Has the EUR/GBP rally run its course?