Dollar holding near the recent lows

On Monday, risk sentiment turned negative and weighed on the dollar.
USD/JPY dropped below back below the 120 pivot. EUR/USD spiked temporary north of 1.14. However closing at UR/USD 1.1379, the daily losses of the dollar against the euro are contained. Yesterday evening, Fed’s Tarullo joined the soft camp within the Fed and indicated that it probably won’t be appropriate for the Fed to raise rates this year. His comments had hardly any impact on the dollar.

Overnight, the Chinese September CPI was reported at 1.6% Y/Y, from 2.0% (1.8% Y/Y). PPI was unchanged at -5.9%. Low price pressures keep the hope alive for more policy stimulation. Even so, this hope is not enough to keep Asian markets in positive territory. A poor close in the US yesterday evening weighs.
Most Asian indices show modest losses. China outperforms (Shanghai almost unchanged). Japan underperforms. Even so, the damage for USD/JPY is limited. The pair trades in the 119.60 area. The risk-off sentiment is also a slightly negative for the dollar against the euro. Elsewhere in the region, Singapore eased its policy as it announced to slightly reduce the pace of the appreciation of the Singapore dollar versus the currencies of its trading partners.

Today, the EMU industrial production will be published. The consensus expects a decline of -0.5% M/M. We see a slight upside risk. However, the figure probably won’t have a lasting impact on trading. The US retail sales have more market moving potential. The consensus expects the headline sales to rise 0.2% M/M. Sales ex auto and gas and the control group are both expected at 0.3%. We don’t have strong arguments to take a different view from the consensus.
The US PPI is expected soft at -0.2% M/M. A soft figure might raise further questions on the Fed’s ability to raise rates this year. After the close of the European markets, the Fed’s Beige book, preparing the October FOMC meeting, will be published. After the recent poor payrolls, we look out whether regional Fed districts see a change in local activity. Global markets continue to struggle to assess the health of the global economy and its impact on monetary policy. In a short-term perspective, markets are focused on the impact of weaker than expected data on Fed rate hike path. The dollar is vulnerable in the short-term even as the ECB might ease policy further if economic conditions deteriorate further. However, potential ECB action is probably some way off. So, for now the short-term context is slightly negative for the dollar. A test of the 1.1460 resistance may occur. IF the combination of poor data and risk-off persists, USD/JPY might come under some pressure, too.

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 becomes less obvious, EUR/USD may return toward the year high (1.1719).

EUR/GBP testing key resistance

On Monday, , sterling had a roll-coaster ride. The UK currency took a rather poor start in Asia but spiked higher early in Europe on the headlines of a new bid of ABInbev for SABMiller. EUR/GBP returned temporary below the 0.74 mark.
Cable jumped to the 1.5385/90 area. However, the gains of sterling were again short-lived. Mid-morning, the UK CPI data surprised on the downside. Headline CPI declined to -0.1% Y/Y (a flat unchanged figure was expected). The soft inflation data convinced markets that the lift-off will most probably be later rather than sooner. Cable tumbled from the high 1.53 area to low 1.52 area, later in the session. The pair closed the session at 1.5248. EUR/GBP shot sharply higher and tested the key 0.7483 resistance early in US dealings. The pair ended the day at 0.7463.

Today, the UK labour market data might be key for the next move of sterling.
The unemployment rate is expected unchanged at 5.5%. We keep a close eye at the wage data. Wage growth of 3.0%/3.1% Y/Y (incl/excl bonuses). Wave data in line with or stronger than expected might somewhat amend the price picture after yesterday’s poor CPI data. We also assume that quite some bad news is already discounted in sterling. So, a sustained break beyond 0.7483/93 is no done thing yet. Of course poor data will put sterling under further pressure.

From a technical point of view, EUR/GBP still trades in the upper part of the sideways range capped by 0.7483. The latter was extensively tested yesterday. Sustained trading north of 0.7483 would deteriorate the short-term picture of sterling. This is not our preferred scenario. Even so, partial stop-loss protection on EUR/GBP shorts is warranted.

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