Dollar extends comeback

On Thursday, the USD rebound continued as risk sentiment improved further. It triggered further EUR/USD selling, additionally due to stronger than expected US eco data (GDP & claims). So, the obstacles for the Fed to raise rates in September diminished compared to a few days ago. Interest rate differentials moved further in favour of the dollar. EUR/USD dropped to the low 1.12 area and closed the session at 1.1246 (from 1.1314). USD/JPY this time showed decent gains too.

Overnight, Asian markets join the positive equity trend, but the gains are mostly smaller than in the US. The yuan is trading strong on rumours of PBOC interventions. Japanese equities outperform as USD/JPY rebounds north of 121. Japanese eco data were mixed. Labour data were strong. Spending and retail sales painted a mixed picture . Inflation was close to expectations. The dollar is still close to yesterday’s correction highs against the euro and the yen, but is setting no new correction highs this morning. Maybe, the impressive rebound in commodities is slowing the momentum of the USD rally. The CAD and AUD show moderate gains on the commodity rebound, too.

Today, the eco calendar is moderately interesting. In Europe, the EC confidence indicators are expected slightly weaker. Of late, they showed resilience to the financial turmoil. German inflation will be interesting in the wake of the soft comments from ECB’s Praet earlier this week. A 0.1% Y/Y increase is expected, but we see downside risks. A big negative surprise might be slightly negative for the euro. In the US, we see upside risks for the PCE deflator and the Michigan confidence. So, overall, the data might still be USD supportive and (slightly) euro negative. As was the case earlier this week, FX trading will again be largely affected by the sentiment on risk. Regarding EUR/USD, the recent risk-on decline of the pair makes sense, as the risk-off rise was also very aggressive. Even so, we are a bit surprised by the strength of the dynamics. We also saw some ‘strange combinations’. (EUR/JPY losing substantial ground in a risk-on context; the dollar holding strong as commodities/oil jump sharply higher). For now, there is no good reason to row against the USD positive tide as a Fed rate hike is again fully on the radar. That said, we assume that both the equity-and the USD rally will slow. EUR/USD 1.1017 (start of the latest EUR/USD up-leg) is the first important short term support in EUR/USD.

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 was questioned from a technical point of view. However, the EUR/USD rally was in the first place driven by global market factors (risk-off sentiment) rather than fundamental economic US and EMU news. Despite this technical warning, we maintained the view that the economic and monetary context hasn’t changed in such a way that it calls for a big change in favour of the euro and against the dollar. That said, the risk-off logic can still pop up 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 remains in the defensive

Yesterday’s trading pattern in EUR/GBP and in cable was similar to Wednesday. EUR/GBP followed the decline of EUR/USD to a limited extent. At the same time, cable suffered from broad-based USD strength. During the morning trade, cable held rather stable in the mid 1.55 area while at the same time EUR/USD extended its downtrend, pushing EUR/GBP back below the 0.73 handle. In the afternoon, strong US data weighed on cable, too. GBP/USD dropped temporary below 1.54, but closed the day at 1.5403 (from 1.5463). EUR/GBP closed at 0.7300 (from 0.7317), a limited decline given the price moves in EUR/USD.

This morning, UK consumer confidence was report stronger than expected at 7 from 4, but without effect on sterling. Later today, the preliminary reading of the UK GDP will be published. A confirmation of the 0.7% Q/Q and 2.6% Y/Y of the advance reading is expected, but the details might be interesting. Strong domestic demand might reinforce the case for a BoE rate hike in a not that distant future.

Earlier this week sterling wasn’t in great shape. EUR/GBP hardly declined despite the decline in EUR/USD, while cable recorded substantial losses. So, we look out whether decent eco data will be able to inspire a sterling to catch up. That said, short-term, EUR/GBP might still feel some upward pressure from usual end of month buying, On a somewhat longer horizon, we maintain the working hypothesis that the topside in EUR/GBP becomes better protected, with important resistance in the 0.7483/0.75 area. Interest rate differentials between the euro and sterling are still substantially in favour of the UK currency. A cautious sell-on-upticks approach might be considered.