EUR/USD correction accelerates

On Tuesday, global risk sentiment improved further. This improvement was initially mildly positive for the dollar, but it was in the first place a euro negative. EUR/USD drifted lower in the 1.14 big figure. The decline accelerated when ECB Praet kept the door open for more ECB easing. Later in the session, the dollar received additional support from strong US durable orders and from an additional upleg of US equities. Soft comments from Fed’s Dudley caused only a very temporary pause in the USD ascent. EUR/USD closed the session at 1.1314 (from 1.1517). The gains in USD/JPY were again more moderate. The pair ended the day at 119.92 (from 118.83).

Overnight, Asian equities (including China) join the equity rally from the US yesterday evening, but the gains are more moderate (1-2% on average). The dollar is running into resistance after yesterday’s impressive performance.
EUR/USD is changing hands in the 1.1350 area. USD/JPY traded temporary north of 120 overnight, but still struggles to hold above this barrier. BoJ’s Kuroda downplayed the potential negative impact from China on the US economy . He also indicated that no additional measures are needed now for the BOJ to reach its policy target, even as the Bank has still options left.

Today, there are again only second tier eco data on the agenda in Europe. In the US, the second reading of the US Q2 GDP, the jobless claims and the pending home sales are scheduled for release. For Q2 GDP, an upward revision from 2.3% to 3.2% is expected. We see risks for an even stronger figure. If so, it might be a slightly positive for the dollar, but we don’t expect a really forceful reaction.
Global sentiment on markets was the key driver for trading in the major dollar cross rates this week. This might still be the case today, but the impact of the China crash and of the subsequent rebound will gradually diminish, if no new shocks occur. Equity sentiment remains constructive this morning, but the rebound of (US) equities will probably slow from here. This might also decelerate the USD comeback. Earlier this week we indicated that the dollar maintains a substantial positive interest rate support against the likes of the euro and the yen. This helps to put a floor for the dollar short-term, especially if equities enter calmer waters. The hypothesis that the recent lows in USD/EUR (high in EUR/USD) and USD/JPY might provide (decent) support is gaining credibility. Yesterday’s comments from ECB’s Praet on further ECB easing if Currencies R21,1714-1dR11,1561EUR/USD1,13585-0,0119S11,1292S21,1214 EUR/USD reverses part of recent gains driven by both USD strength and euro weakness EUR/USD correction accelerates USD/JPY: still struggles to regain the 120 level Tion US GDP is expected to be revised substantially higher Short-term momentum remains USD constructive, but the USD rally might take a breather after recent strong gains This morning, the dollar rally takes a breather even as equity sentiment remains constructive necessary might also cause some investors caution on the euro going into next week’s ECB meeting. After the impressive USD gains of the previous two days, the dollar rally will probably slow/take a breather. However, we don’t expect a big setback unless the China equity crisis returns. Short-term, a cautious buy-USD on dips strategy can be maintained, especially against the euro (sell EUR/USD on upticks). We are less convinced on the upside potential of USD/JPY.

In a longer term perspective, EUR/USD broke (temporary?) beyond the 1.1534 resistance (post-ECB QE top). This level was/is an important reference for our LT term EUR/USD short bias, which is now questioned from a technical point of view. The EUR/USD rally was in the first place driven by global market factors (risk-off sentiment) rather than fundamental economic news from the US or from Europe. Despite this technical signal/warning, we maintained the view that the economic context hasn’t changed in such a way that the prospects for monetary policy in the US and in Europe call for a big change in fortunes in favour of the euro and against the dollar. That said, the risk-off logic can still pop up for a while and trigger pockets of USD weakness. For now, we see 1.1017/1.1714 as the new trading range. Within this range, a cautious sell-on-upticks approach is favoured going into the Fed September policy meeting.

Sterling disappoints

On Wednesday, sterling staged a rather disappointing performance. The UK eco data (loans for home purchases and CBI distributive trades) were OK, but failed to trigger strong GBP buying interest. EUR/GBP drifted cautiously lower in the 0.73 big figure, but the decline was moderate given the losses in EUR/USD. The reaction of EUR/GBP to the Praet comments was also very limited. The poor sterling sentiment was even more obvious in cable. The pair joined the EUR/USD sell-off to a very large extent and lost more than two big figures. Cable closed the session at 1.5463 (from 1.5687). The moves in EUR/GBP were limited. The pair closed at 0.7317 (from 0.7342).

This morning, UK Nationwide House prices were reported close to expectations (0.3% M/M; 3.2% Y/Y). Cable is regaining a few ticks on USD weakness. EUR/GBP is also a touch higher in line with EUR/USD. Later today, the UK calendar is empty. Earlier this week sterling (especially EUR/GBP) didn’t show a clear trading pattern. Even so, we still maintain the working hypothesis that the topside in EUR/GBP is growing better protected, with important resistance in the 0.7483/0.75 area. Interest rate differentials between the euro and sterling are still substantial and in favour of the UK currency. A cautious sell-on-upticks approach can be considered.