EUR/GBP hurt by soft Draghi comments

Soft ECB talk pushes euro further south

On Thursday, trading on global markets initially entered calmer waters. Risk sentiment remained constructive and put a floor for the dollar. During the afternoon, USD strength was replaced by euro weakness as ECB Draghi was extremely soft at the ECB press conference. EUR/USD lost around one big figure. The decline in core bond yields also slightly hurt USD/JPY. Later in US dealings sentiment on risk turned again risk-off. Even so, the losses of the dollar were limited. USD/JPY closed the session at 120.07 (from 120.33). EUR/USD ended the session at 1.1123 (from 1.1227).

Overnight, mainland China stock markets are still closed. However, this time it doesn’t prevent other Asian markets from recording again substantial losses.
Global uncertainty on the health of the Chinese economy and on the timing on the first Fed rate hike apparently keep global/Asian investors in a defensive mode. USD/JPY drifts further south off the 120 pivot and currently trades at 119.30. EUR/USD is holding rather stable after yesterday’s post-ECB sell-off.
The pair is changing hands in the 1.1125/30 area. Yesterday, commodities like oil and copper were temporary in better shape, at least partially supported by the possibility of further ECB stimulation. However, the risk-off setback late in the US and this morning in Asia erased the latest commodity uptick. This weighs on AUD, too. AUD/USD set a new multi-year low this morning in the 0.6959 area.

Today, the calendar in in Europe is thin. The focus will be on the US payrolls report. The report is one of the last important data going into the September Fed meeting. The consensus expects moderate payrolls’ growth (217.000).
Markets will also keep a close eye on the unemployment rate and on wage growth. We see risks for a slightly lower than expected headline payrolls figure. However, we don’t expect the payrolls to be that weak that they will close the door for a September Fed rate hike. In such a scenario, the debate on the pro’s and contras of a Fed lift-off in September might still continue and might fuel global market uncertainty and volatility, especially as uncertainty on China continues to persist, too. Of late, this context was (moderately) negative for the dollar. USD/JPY is apparently becoming more vulnerable to such a scenario.
After yesterday ‘s extremely soft ECB talk, the topside in EUR/USD should be better protected, especially in case of a moderate risk-off sentiment. After the payrolls, we also keep an eye at the G20 meeting in Turkey this weekend. Will central bankers hint to any action to address recent market uncertainty/volatility?

In a longer term perspective, EUR/USD broke (temporary?) beyond the 1.1534 resistance (post-ECB QE top) early last week. This level was 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. Yesterday’s very soft tone from the ECB confirms this view. 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 remains favoured going into the Fed September policy meeting.

EUR/GBP hurt by soft Draghi comments

Yesterday, the news flow from the UK was again sterling negative. The UK services PMI dropped from 57.4 to 55.6. A limited rise to 57.7 was expected.
Sterling was already in the defensive against the euro and the dollar in the run-up to the publication of the report. EUR/GBP touched an intraday top in the 0.7375 area around the publication of the services PMI report. Cable dropped to the 1.5240/50 area. Later in the session, the euro decline after the ECB press conference affected the sterling cross rates too. EUR/GBP dropped temporary below the 0.73 big figure and closed the session at 0.7290 (from 0.7338). Cable also set a new correction low on overall USD strength but rebounded slightly later. The pair closed the day at 1.5258 (from 1.5299).

Today, only the UK August car registrations are on the agenda , but this is no market mover for currency trading. Yesterday, sterling trading was driven by conflicting signals (negative UK news and a weak euro). Global factors will continue to set the tone for sterling trading. In line with EUR/USD, we assume that the topside in EUR/GBP is well capped. Cable is still looking for a bottom.
For now, there is no indication that a solid bottom will soon be in place.