EUR/GBP extends decline

Dollar propelled by hawkish Fed statement

Yesterday, investors initially were apparently covering positions against a potentially soft Fed statement. USD/JPY didn’t go anywhere even as European and US equities traded with a positive bias. EUR/USD was squeezed higher away from the recent lows and traded the 1.1080 area just before the Fed policy announcement. The Fed policy statement was more hawkish than expected. The Fed kept the door open for a December lift-off and wasn’t too worried about recent softer US eco data. US bond yields jumped higher and so did the dollar. USD/JPY rebounded to the 121.25 area and closed the session at 121.09 (from 120.46). EUR/USD dropped to the low 1.09 area and closed the session at 1.0923 (from 1.1051 on Tuesday).

Overnight, most Asian equity indices trade mixed (Japan about flat, mainland China in positive territory, most other Asian indices in negative territory ). This contrasts with the Post FOMC US equity rally. The trade-weighted dollar is trending higher and trades currently at 97.55 (the cycle high stands at 100.39, first key resistance at 98.36). USD/JPY is drifting off yesterday’s highs and trades currently in the 120.75 area. EUR/USD is trading in the 1.0930/35 area, marginally higher from the post-FOMC low.

Today, the eco calendar is again very well filled. In Europe, it contains the German CPI data & labour data and the EC confidence indicators. For the German HICP a rebound from -0.2% Y/Y to 0.0% Y/Y is expected. We side with consensus. A softer than expected CPI would highlight the policy divergence between the ECB and the Fed and weigh on the euro. In the US, the initial jobless claims and the advance reading of the US Q3 GDP will be published.
Jobless claims are expected to stay low at 265.000, while US Q3 GDP is expected to have increased by an annualised 1.6% Q/Q. Private consumption is expected solid. Inventories and net export will probably weigh on growth. The risks are for an above consensus outcome. If so, it supports the case for a December Fed rate hike and support the dollar. In a day-to day perspective, we expect the dollar to stay strong in the wake of the FOMC policy statement, especially against the euro. The picture for USD/JPY might be less buoyant if the equity rally slows.

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) became better protected. The ECB prepared markets for a new round of monetary easing which pushed EUR/USD below the key 1.1087/1.1105 support. Yesterday’s Fed policy statement ‘confirmed’ a potential policy divergence between the Fed and ECB, pushing EUR/USD further south in the LT consolidation pattern. 1.0819 is a first important support area. The targets of the multiple top with neckline in the 1.1087/1.1105 are in the low 1.07 area. For now, there is no reason to fight the euro negative/USD positive tide.

EUR/GBP extends decline

With no UK eco data on the calendar, sterling trading was at the mercy of the global market repositioning ahead of the Fed policy decision yesterday. Cable hovered directionless in a tight range slightly below the 1.53 big figure. The pair jumped higher ahead of the FOMC decision, but dropped back to the mid 1.5250 area on global post-Fed USD strength. EUR/GBP was initially squeezed higher by the overall rebound of the euro (EUR/USD), but the pair also returned back below 0.72, in the wake of the Fed policy decision.

This morning, the UK Nationwide House prices were close to expectations at 0.6% M/M and 3.9% Y/Y. Later today, the September money supply and lending data will be published. Later the CBI will also publish the October reported sales. Lending data are expected to improve further. For CBI sales, a moderate easing from 49 to 35 is expected. We see slight downside risks to today’s UK data. If so, it might be a slightly negative for sterling, especially against the dollar.

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 tested the 0.7196 support, but the level was ‘really’ broken after yesterday’s FOMC announcement. Euro weakness still prevails. We maintain a sell-on-upticks approach for EUR/GBP.

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