EUR/GBP joins the global decline of the euro

ECB and PBOC fuel dollar rebound

On Thursday and on Friday, the ECB and the PBOC were the trendsetters for trading. On Thursday, the ECB almost pre-announced a further easing in policy at the December meeting, pushing the euro off a cliff. On Friday, the PBOC also reduced its policy rate and the reserve requirement ratio for banks. This additional easing reinforced the risk-on sentiment and supported further USD gains. EUR/USD tested the 1.10 barrier and closed the week at 1.1018. USD/JPY ended the session at 121.47.

Overnight, Asian equities mostly show modest gains of less than 1%. So, the equity reaction to Friday’s PBOC policy easing is positive, but not euphoric at all. During the weekend, there were comments from Chinese officials that China won’t defend the 7% growth goal at any price. The comments did come in the run-up to a meeting later this week that will set the growth targets for the next five years. Markets probably see this as China preparing for a structural decline in trend growth. This slowed the post PBOC equity rebound. The CNY didn’t really decline in the wake of the PBOC easing. USD/CNY is trading near the 6.35 level. USD/JPY is coming off the highs reached at the end of last week and early in Asia this morning. Limited equity gains probably slow the USD rebound. The dollar also regains slightly ground against EUR/USD, trading in the 1.1035 area.

Today, the calendar contains the German IFO business climate. Markets will look out whether there is any substantial impact from the Volkswagen. Friday’s PMi’s suggest that the damage might be limited, for now. A weaker than expected IFO might be a slightly negative for the euro. However, it won’t change the global picture on the (im)balance between the Fed and the ECB. Neither will the US new homes sales.
In the wake of the ECB press conference, markets will now look forward to the Fed policy decision/statement on Wednesday. Markets focus will be whether the Fed changes its tone after the recent weaker US eco data and after the policy intentions/actions from the ECB and the PBOC. In a day-to-day perspective, the USD rally might slow as might be the case for equities.
However, especially for EUR/USD there is no reason to row against the tide. We don’t expect the Fed statement to be really different from the September one. If so, the debate on a Dec. Fed rate hike may continue. So, we expect the USD to remain rather well supported against the euro going into the FOMC decision.

In a longer term perspective, global markets recently struggled to assess the health of the global economy and its impact on monetary policy. Initially, (currency) markets focused on the impact of weaker US data on the Fed rate hike path. That made the dollar vulnerable. Last week, markets were positioned for soft ECB speak, but at the press conference, ECB’s Draghi went much further towards additional easing than markets anticipated. The topside in EUR/USD (1.1460/95 resistance) was extensively tested, but the test was rejected, making the topside in EUR/USD better protected. The ECB preparing markets for a new round of monetary easing pushed EUR/USD beyond the key 1.1087/1.1105 support. If confirmed, this break paints a multiple top formation on the charts. The targets of this formation are in the low 1.07 area.

EUR/GBP joins the global decline of the euro

At the end of last week trading in sterling was in the first place driven by global factors. On Thursday, strong UK retail sales temporary supported the UK currency, both against the euro and the dollar. On Thursday, global euro weakness prevailed, pushing EUR/GBP around one big figure lower. On Friday, USD strength was the name of the game. This move at most impact on cable, but EUR/GBP stayed under pressure, too. EUR/GBP closed the week at 0.7194. Cable ended the week at 1.5314.

During the weekend, BOE’s Carney said that there is a prospect a possibility, but not a certainty of rate rise. Carney did speak in a conditional way and didn’t openly chance its assessment on a BoE rate hike. Even so, markets might read the quotes as a softening in the BoE’s stance.

Today, BBA loans for home purchases and the CBI trends orders and CBI optimism will be published. The BBA loans are expected to rise further. For the CBI data, a slight easing is expected. We expected the UK data to be only of intraday significance for sterling trading. Maybe there is a slight asymmetrical risk. Sterling might be slightly more vulnerable for bad news from the UK, rather than for good news. However, the global trading patterns in euro and the dollar will probably set the tone for trading in cable and in EUR/USD.

Looking at the broader picture, the downside in sterling against the euro (EUR/GBP 0.7483/0.75 strong resistance) looked already better protected last week. The soft tone at the ECB press conference pushed EUR/GBP back lower in the longstanding sideways range. The pair dropped temporarily below the 0.7196 support and the test of this level is ongoing. Euro weakness currently prevails, but EUR/GBP looks a bit oversold short-term. We look to sell EUR/GBP on upticks.

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