Looking out for the Q3 UK GDP

Dollar rebound takes a breather ahead of the Fed

Yesterday, markets entered calmer waters after the big swings at the end of last week. The USD held most of its gains against the euro and the yen, but there were no follow-through gains for the US currency. A slowdown in the global equity rally also prevented further USD gains. USD/JPY closed the session at 121.10 from 121.47 on Friday evening. EUR/USD ended the session at 1.1058, from 1.1018.

Overnight, Chinese industrial profits declined by -0.1% Y/Y, quite a smaller decline compared to the last month (-8.8%). It didn’t comfort Asian investors. Asian equities are in the red across the board. The equity correction is a slightly positive for the yen and a negative for the USD. USD/JPY trades in the 120.65 area. EUR/USD is changing hands in the 1.1055 area. Currency investors are looking forward for tomorrow’s FOMC statement and for the BOJ’s policy decision on Friday.

Today, the eco calendar in the EMU only contains the M3 money supply data. Markets will keep an eye at the lending data, but the indicator is seldom a market mover for currency trading. In the US, the US durable orders, the S&P/CS house prices, the Market PMI’s, consumer confidence and the Richmond Fed manufacturing index will be published. We see slight upward risks for the durable orders, but downside risk for the Richmond Fed index. Consumer confidence is expected stable at 103. Maybe there are also slight downside risks for consumer confidence (labour related), but the index remains at a lofty level. The US data will be read against the background of this week’s FOMC meeting, even as the direct impact on Fed policy of today’s data will be limited. That said, weaker than expected US data could still put some pressure on the Fed to ‘officially’ delay a first rate hike into 2016. Such a scenario might slow the recent rally of the dollar. However, we don’t expect currency investors to place big bets ahead of tomorrow’s Fed decision (and to a lesser extent ahead of the BOJ decision on Friday).

In a day-to-day perspective, markets are now looking forward to the Fed policy decision/statement on Wednesday. The market will focus on 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 which could also 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 December 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 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 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 it better protected. The ECB prepares markets for a new round of monetary easing which pushed EUR/USD below 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.

Looking out for the Q3 UK GDP

Yesterday, the UK BBA loans for home purchases unexpectedly declined. Later in the session, the CBI trends orders/Business optimism also missed the consensus by a substantial margin. Even so, the impact on sterling trading was limited and very short-lived. Sterling trading remained at the mercy of the global trend in the euro and the dollar. Cable hovered mostly in the lower half of the 1.53 big figure, but rebounded after the poor US new home sales. The pair closed the session at 1.5352 from 1.5314 on Friday evening. EUR/GBP opened marginally stronger, but traded with a slight negative bias for most of the day, before regaining the euro losses later in the session. EUR/GBP closed the day at 0.7203, almost unchanged from 0.7194 on Friday.

Today, the first estimate of Q3 UK GDP will be published. The consensus expects ongoing decent growth (0.6% Q/Q, 2.4% Y/Y) supported by healthy domestic demand (and services sector growth). However, the details of the demand side of the growth story won’t be available yet. A figure in line with consensus or better than consensus in theory should be slightly supportive for sterling. However, given the recent flaring up of a ‘global easing campaign’, there is ever growing uncertainty on the BoE’s intentions. So, we expect any reaction of sterling to be guarded unless there is a really big deviation from consensus. BoE guidance will decide on the next move of sterling.

Looking at the broader picture, 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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