BOE minutes in focus

Dollar going nowhere

On Wednesday trading in EUR/USD and USD/JPY was mainly driven by technical considerations. The price action was again confined to tight ranges. There were no important eco data in Europe and in the US. The rally in commodities and equities also failed to give a clear guidance for USD trading. EUR/USD closed the session at 1.1237 (from 1.1272 on Tuesday). USD/JPY ended the day at 120.01 (from 120.23).

Overnight, Asian equities fell prey to profit taking after the recent risk-on rally. Mainland China indices reopen after the Golden Week Holidays with gains of about 4%. This is a bit disappointing given the gains on other regional markets during the previous week. So, it looks that the global risk rebound is losing some momentum. The dollar is losing slightly ground against the euro EUR/USD at 1.1260) and the yen (USD/JPY currently at 119.85) but the losses are very modest and both cross rate are well anchored within the established ranges. Japanese August machinery orders were very weak. There was some volatility in Japanese equities and in USD/JPY after the publication of the data. The report questions the rather positive assessment of BOJ’s Kuroda after yesterday’s policy meeting and rekindles calls for more easing. However, in the end the yen is trading slightly stronger in line with sliding equities.

Today, there is only second tier eco data on the calendar in Europe. In the US, the weekly jobless claims might spark some intraday volatility. Claims are expected to decline after last week’s uptick. We also keep a close eye on central bankers’ speak. At noon, ECB’s Praet will speak. Will he reiterate/ reinforce the case for more ECB easing in the near future? In the US, Fed’s Kocherlakota (ultra dove) and Fed’s Williams will speak. Markets will also keep a close eye at the Minutes from the September meeting; the meeting where the Fed finally decided not to raise rates. Global sentiment on risk will also leave its traces on USD trading. USD/JPY is drifting slightly lower in the established range and this process might go a bit further if equities would fall prey to some profit taking. The dollar might also lose ground slightly against the euro, but soft ECB speak might limit the upside in EUR/USD. We also look out how the commodity rebound develops and whether it will have any impact on USD trading.

The short term picture in the EUR/USD cross rate remains neutral. It looks difficult for the pair to break out of the 1.1087/1.1460 trading range. 1.1319 marks the post-payrolls high and is a first intermediate resistance.

In a long term perspective, EUR/USD and USD/JPY might see more range trading. A Fed rate hike will probably be delayed, but such a scenario also raises the chances for more ECB or BOJ easing. In this context, both EUR/USD and USD/JPY might hold the recent ranges. If the policy divergence between the Fed and the ECB would become less obvious, EUR/USD may return toward the topside of this range.

BOE minutes in focus

On Wednesday, sterling trading was influenced by different drivers, both from inside and from outside the UK. Early in the session, M&A related headlines (higher Bid from AB Inbev for SABMiller) probably supported the UK currency. Mid-morning, manufacturing and industrial production data surprised on the upside. The details of the manufacturing report were mixed, but those details didn’t prevent sterling to stay strong. Cable jumped north of 1.53. EUR/GBP dropped to the mid 0.73 area. Later in the session, the speech of UK PM Cameron before the Conservative Party Conference didn’t bring much new on the UK/EU relations (Brexit). EUR/GBP closed the session at 0.7336 (from 0.7404). Cable ended the session at 1.5319 (from 1.5227).

Overnight, the RICS house price balance was softer than expected at 44% (from 53%, 55% was expected). EUR/GBP is trading a few tick higher this morning, but this is probably due to overall euro strength rather than sterling weakness. Later today, the BOE holds a regular policy meeting. Policy will be remain unchanged, but investors will scrutinize the minutes on changes in the BOE’s assessment on the economy and on markets. Of late, several BoE members indicated that they preferred not to wait too long before raising interest rates. It will be interesting to see whether/to what extent BoE governors have softened their view after the Fed decision to leave interest rates unchanged and given recent market volatility. We have to impression that markets are positioned for a very soft BoE assessment. Maybe the BOE sounds less soft than feared. In such a context, the damage for sterling might be limited.

From a technical point of view, EUR/GBP is still trading in the upper part of the trading range which is marked by the 0.7423/0.7483 boundaries. The 0.7423 was extensively tested, but no sustain break occurred. Trading north of 0.7483 would deteriorate the sterling short-term technical picture, which is not our preferred scenario. Even so, partial stop-loss protection on EUR/GBP shorts can still be considered.

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