Euro and USD looking for more clear guidance

On Thursday, there was no clear story to guide currency trading. EMU data were mixed. US jobless claims declined to the lowest level since 2000, but even that wasn’t enough to extend Wednesday’s post-Fed USD gains. At the same time, investors are cautious on European assets and on the single currency as uncertainty on Greece lingers. This resulted in directionless trading for EUR/USD, USD/JPY and several other markets.

This morning, Asian equity markets trade mixed too. Japanese labour data were slightly better than expected. Several other indicators, including CPI, were mixed. Japanese equities slightly outperform even as USD/JPY is drifting back lower off the overnight correction top in the 118.50 area. The dollar is slightly in the defensive overall this morning with EUR/USD changing hands in the 1.1340 area. In a broader perspective, USD/JPY and EUR/USD continue the consolidation pattern of the previous sessions, looking for new guidance after the recent sharp moves in the major euro cross rates.

Over the previous days, the commodities currencies (AUD, CAD and NZD) were under heavy pressure. There is no real sign of a trend reversal yet, but this morning there are tentative signs that the sell-off might gradually slow. This is of course nothing more than a fragile hypothesis and needs to be confirmed. Even so, it deserves monitoring and could be interesting for other markets too.

Today, EMU inflation and unemployment rate will be published. The consensus expects headline inflation to decline further into negative territory from -0.2% Y/Y to -0.5% Y/Y. After yesterday’s German inflation, the risks might be to the downside. Core inflation might be ever more important from a market point of view. A miss might be negative for sentiment on risk in Europe. However, as often mentioned of late, risk-off and lower core bond yields are an ambiguous factor for the euro. In the US, markets will keep a close eye on the first estimate of the US Q4 GDP. 3% Y/Y annualized growth is expected. We see slight downside risks to the consensus. A substantial undershoot might raise doubts on the pace of the US recovery, questioning the Fed’s rate hike scenario and weigh on the dollar. Last but not least, Greece might also still figure in the headlines of the financial newswires. Eurogroup chairman Dijsselbloem meets the Greek PM and FM in Athens. It are just informal talks and it would be a quite a surprise if both parties find strong common ground.

So, as was the case earlier this week, currency traders are still confronted with mixed signals and the interconnection between different markets (bond and equities on the one hand and currencies on the other hand) remains misty.
Lingering tensions on Greece remain a potential negative for the euro, but in a day-to-day perspective, we expect more consolidation in EUR/USD. Further sustained USD gains against the euro might remain difficult in a context of lower core bond yields and fragile/risk-off equity sentiment. So, more erratic trading might be on the cards in EUR/USD.

In the wake of the ECB’s QE decision, we don’t row against the LT negative EUR/USD trend. A lot of investors are probably still wrong-footed by the speed of the recent decline. Upticks might still be used to buy the dollar/sell the euro. This week’s euro correction is no trend reversal yet. We stay cautious on USD/JPY even as the pair held up well this week. The downtrend in core (USD-EUR) yields may continue to cap the topside. In addition, at some point, Asian/Japanese equities might become nervous on the ‘competitive’ devaluations in EMU and several other countries. A risk-off correction might bring the yen in the picture. EUR/JPY already cleared the EUR/JPY 134 support area and extensively tested the 131.22 support (Dec 2013 low + MT Neckline). Admittedly, tensions eased early this week. The comparable range bottom in USD/JPY stands at 115.57. This level is still far away, but we keep an eye on it.

Sterling ceding ground

On Thursday, the Nationwide House prices and the CBI reported sales were published in the UK. The house prices were very close to expectations. The CBI sales indicator declined from a spectacularly high 61 to a still very lofty level of 39 (32 expected). However, as is often the case for these data, they were ignored by the currency market. EUR/GBP mostly tracked the gyrations in the EUR/USD headline pair and closed the session north of 0.75. Cable initially traded with a slight negative bias (underlying USD resilience?), but the decline accelerated late in the session. The UK 10-year yield setting an all-time low might have been a negative for sterling. Cable closed the session at 1.5067, quite a substantial loss compared to Thursday’s close (1.5139).

Overnight, GfK consumer confidence was stronger than expected, but didn’t help sterling much. Later today, the UK money supply and lending data will be published. The market reaction to these data is mostly limited. Sterling clearly feels some end-of month weakness. However, we don’t expect that this will change the established EUR/GBP downtrend. We look to sell into more pronounced EUR/GBP up-ticks.