KBC Market Research Desk
KBC Bank
Yesterday. the risk-on rally ran into resistance. The losses on the equity markets were modest, but enough to halt the recent rebound of the dollar against the euro The euro received also some support from an improvement in lending according to the ECB lending survey. EUR/USD ended the session slightly higher on a daily basis (1.1346 vs 1.1327 on Monday). Trading in USD/JPY was primarily order driven. The pair performed relatively well given the loss of momentum on the equity markets. It closed the session at 119.84 (from 119.50).
Overnight, the Japanese September trade balance showed a larger than expected deficit. Weaker than expected exports suggest rather poor global demand. This context might reinforce calls for more policy stimulation by the BOJ (and from other central banks). Asian equities mostly show modest gains with Japan outperforming and China underperforming. The yen is weakening with USD/JPY nearing the 120 level. EUR/USD is gaining a few ticks compared to yesterday’s close and trades currently in the 1.1360 area.
Today, the eco-calendar is again almost empty both in Europe and in the US. So, trading in major USD cross rates will again be at the mercy of global markets developments. Sentiment on risk is rather constructive this morning, supported by the hope that global stimulus will remain in place for longer. This is a mixed picture for the dollar. It should be fairly neutral for EUR/USD. Sentiment on USD/JPY might improve a bit further. However, we don’t expect both cross rates to break out of the well-established ranges. With no high profile news on the agenda, markets will look forward to tomorrow’s ECB policy meeting and press conference. Of late, several members indicated that it is too early to take action now. More sideways trading might be on the cards going into the ECB policy decision. We don’t expect the ECB to take additional measures yet. Even so, the topside of EUR/USD might be rather well capped as ECB’s Draghi will sound soft and lay the groundwork for more easing, maybe in December.
In a longer term perspective, global markets struggle to assess the health of the global economy and its impact on monetary policy. Of late (currency) markets were focused on the impact of weaker US data on the Fed rate hike path. This made the dollar vulnerable. However, in absence of key US eco data this week, attention turns to the ECB which may send a dovish message at its Thursday’s meeting. The 1.1460/95 resistance was extensively tested, but the test was rejected. The jury is still out, but the topside in EUR/USD is better protected.. First support for EUR/USD stands at 1.11. In a longer term perspective, if the policy divergence between the Fed and the ECB becomes less outspoken, EUR/USD may return toward the August correction high at 1.1719. USD/JPY looks more vulnerable to a delay in the Fed rate hike cycle in case of risk-off and/or rising volatility. However, for now global sentiment on risk remains quite constructive.
Sterling extends cautious rebound
Yesterday, Cable spiked higher early in European dealings. The pair approached the recent highs in the 1.5508 area. However, with no hard news to support the move, sterling strength evaporated soon. Cable dropped back below the 1.55 mark. EUR/GBP trended gradually higher, reversing part of Monday’s decline. The move was in the first place technical in nature. BoE McCafferty maintained his hawkish tone as he said the BoE needs to avoid being behind the curve. However, the impact on sterling trading was limited. Cable couldn’t sustain north of 1.55. EUR/GBP followed to a large extent the gyrations in EUR/USD. The pair rebounded to the 0.7350/55 area around noon. Early in US dealings, sterling trading remained erratic and confined to tight ranges. EUR/GBP closed the session at 0.7346 (from 0.7324). Cable ended the session little changed at 1.5444 (from 1.5447).
Today, the monthly UK public finance data will be published. The usually have only a limited impact on sterling trading, unless there is a big deviation from consensus. Later (7 pm CET), BoE governor Carney gives a speech in Oxford. At the same time, the BoE might release a report on how EU membership affects the central bank’s policy framework. Comments from BoE governor Carney on this politically sensitive issue will probably be guarded. The debate on Brexit as such is a negative for sterling.
Looking at the broader picture, the downside in sterling (EUR/GBP 0.7483/0.75 strong resistance) looks better protected. At the same time, a dovish ECB might help to extend the recent decline in EUR/GBP short-term. From a technical point of view, EUR/GBP tries to sustain south of the 0.7333 short-term support. A drop below 0.7333 paints a sterling bullish double top on the charts, which could extend the decline in EUR/GBP towards 0.72 (tough resistance for sterling). Some further sterling gains against the euro might be on the cards short-term, but we expect the pair to maintain the established ranges.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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