EUR/USD ends choppy trading session unchanged

On Friday morning, the decline of the euro halted temporarily. Higher than expected German (and Spanish) inflation and a slight rebound in European yields prevented further losses. However, the rebound was unconvincing and attracted soon renewed selling. EUR/USD even set a new short-term correction low during a choppy US trading session. At the end, EUR/USD was nearly unchanged though at 1.1196. USD/JPY initially traded with a slight negative bias as profit taking occurred on Thursday’s gains. By mid-US session the pair moved higher again and closed at 119.63, a small gain compared to Thursday’s 119.41 close.

Overnight, Asian equities couldn’t really profit from a surprise 25 bps rate cut of the Chinese benchmark rates. Official Chinese manufacturing PMI for February stabilized just under the 50 boom/bust level (Saturday) while the HSBC measure increased to 50.7 from 50.1 previously. Japanese manufacturing PMI stabilized at 51.6. Asian equities show small gains, compared to closing losses in the US. US equity futures turned up a bit. So, sentiment might be slightly risk-on at the start of trading. In early Asian dealing, US yields are marginally higher (on comments of Fed vice chair Fischer?;see Fixed Income). Greece could get part of the bailout funds already in March (risk-on, see headlines). EUR/USD slid to 1.1160, but rebounded back near the 1.1190 level, Friday’s close. USD/JPY is slightly higher at 119.80 from 119.68 previous close.

Today, the final EMU business sentiment PMI’s will be published. We expect little changes (maybe slightly higher) and thus minor market impact. The European CPI is more interesting, but following national data that surprised on the upside, the sting is a bit out of the release. The consensus expects EMU flash CPI to be less negative. Risks are to the upside of consensus, but consensus is outdated. If there would nevertheless be a rise of core European yields due higher inflation, it would be slightly euro positive. However, the ECB starts buying sovereign and agency bonds under its QE programme, probably from next week onwards. It will be the dominant factor on the European (bond) markets and keep European rates contained and thus keep the euro under pressure in a first stage or at least limit the topside of the euro.

In the US, the personal income and spending data and the manufacturing ISM are published. The manufacturing ISM showed a loss of momentum over the previous months and we see no reason for a real trend reversal. Of late, the reaction of the dollar to the ISM was limited. An upward surprise in the PCE deflator on the contrary would support the dollar. To summarize: the data probably won’t provide clear guidance for EUR/USD trading. For USD/JPY, we see limited upside. US equity indices show signs of a topping out process. In case of an equity correction, USD/JPY might even come under slight pressure.

From a technical point of view, 1.1534 (reaction high)/1.1679 (reaction top) remains our first topside reference. A sustained break will be difficult. On the downside, the 1.1098 (correction low) is again on the radar. For a sustained break of this level a substantial rise in US bond yields is needed. The payrolls (Friday) are the next high profile US data. The dollar can stay well bid against a weak euro short-term, but confirmation from strong Payrolls is needed to start a new USD up-leg beyond the cycle low in EUR/USD. We maintain a EUR/USD sell-on-upticks approach but still hope for higher levels to add EUR/USD short exposure. For USD/JPY the key 120.83/121.85 resistance stayed out of reach for now. The pair holds well within the 115.57/121.85 trading range. A sell-on-upticks approach within this range is preferred.

EUR/GBP sets again new low

On Friday morning, in technical trading, sterling fell prey to some moderate profit taking against the euro. The pair retested the 0.73 area, but new selling kicked in and pushed the pair back lower to another multi-year low (0.7246). Cable was slightly in the defensive in the morning. The pair tested bids below the 1.54 big figure, but showed decent resilience and traded even stronger in a volatile afternoon session. Cable closed at 1.5428 versus 1.5407 previously. EUR/GBP closed at 0.7253. Concluding, underlying sentiment on sterling remained constructive.

This morning, the Nationwide house prices were reported weaker than expected but its impact is ignored. EURGBP trades currently at 0.7259, nearly unchanged versus Friday eve, but in very thin early Asian trading, Bloomberg notes a new cycle low of 0.72335 (which carries little weight though).

Later today, the February Manufacturing PMI will be released. All three PMI’s surprised on the upside in January. For today’s manufacturing PMI a limited gain from 53.00 to 53.3 is expected. We side with consensus. Given the recent good performance of sterling a substantial positive surprise is needed to inspire further outright sterling gains. This applies especially to cable. For EUR/GBP, euro weakness was at least as important as a driver as strong UK data. This factor might still be at work. We maintain our sell-on-upticks approach.