USD rally running into resistance, for now

On Friday, the last trading day of the month, investors secured some of the recent dollar gains. The dollar drifted lower against the euro and the yen during most of the session. The eco data in Europe were OK. The US data were mixed, but the dollar lost slightly further ground after a weaker than expected final Michigan confidence. However, the setback of the dollar was short-lived. The dollar even regained most of the losses later in the session, even as Fed Williams ‘downplayed’ the hawkish tone of the Fed policy statement. EUR/USD closed the session at 1.1006 (from 1.0977). USD/JPY ended the day at 120.62 (from 121.13).

During the weekend, ECB’s Draghi repeated the ECB’s intention to ease policy further, but its tone on a further reduction of the deposit rate was less outspoken. The official Chinese manufacturing PMI’s were slightly weaker than expected, while the Caixin manufacturing PMI this morning improved more than expected from 47.2 to 48.3. Even so, the data don’t help Asian equity markets, which trade well in the red. USD/JPY is holding a rather tight range in the lower half of the 120 big figure. EUR/USD opens slightly stronger this morning (1.1035) as the risk-off sentiment is weighing slightly on the USD across the board.

Later today, the focus will be on the final EMU PMI manufacturing confidence. Of late, sentiment indicators from the EMU were rather encouraging. So, we expect the preliminary figure to be confirmed, which shouldn’t affect the euro much or at the margin be slightly positive. In the US, the focus will be on the manufacturing ISM. A further decline from 50.2 to 50.0 is expected, but we see downward risks, which might be a negative for the dollar.
Aside from the eco data, global sentiment on risk might again become more important for USD trading. There are tentative signs that the recent ‘global’ equity rebound is losing momentum. In case of some further equity profit taking it might be a slightly negative for the dollar. In a day-to day perspective, both the eco data and global sentiment on risk suggest some downside risks for the dollar at the start of the new trading week. At least, there is no reason to anticipate a new meaningful up-leg of the dollar now, unless the US eco data would surprise in the upside or unless the Fed speaks clearer on a December rate hike. Especially , the latter is unlikely ahead of the payrolls.

Over the previous two weeks; the market focus changed in favour of the dollar. At the ECB press conference, ECB Draghi surprised markets by suggesting that additional easing was forthcoming. This pushed EUR/USD below the key 1.1087/1.1105 support. Last week’s Fed policy statement ‘confirmed’ a 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. Some short-term consolidation on the recent USD rally is possible, but there is no reason to fight the euro negative/USD positive tide.

UK manufacturing sector to lose further momentum?

Trading in cable and in EUR/GBP was mostly driven by technical considerations. Initially, cable and EUR/USD moved more or less in lockstep, keeping EUR/GBP in a directionless sideways range. Later in the session, fortunes changed in favour of sterling. The initial decline of the dollar was reversed and in this move cable finally outperformed EUR/USD. Cable closed the session at 1.5428, from 1.5310. EUR/GBP tested the 0.72 level intraday, but finally closed the session at 0.7133 (from 0.7170). So, after all, it was a constructive session for sterling investors even as there was little UK specific news.

Today, the UK manufacturing PMI will be published. Recently, growth momentum in this part of the economy declined rather sharply. For October a further decline from 51.5 to 51.3 is expected. The services sector is more important for UK growth than the manufacturing one. Even so, a below consensus figure might be a temporary negative for 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 tested the 0.7196 support, but the level was ‘really’ broken after the FOMC announcement. We maintain a sell-on-upticks approach for EUR/GBP.

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