USD little affected, as risk sentiment turns fragile

On Monday, there were no eco data. Even so, the dollar maintained its post-payrolls’ gains. The USD-positive/euro negative sentiment was reinforced by a Reuters article that the ECB was considering an aggressive deposit rate cut.
Later, US equities fell prey to profit taking. This equity decline took the shine of the USD/JPY rally. The pair closed the session at 123.18, little changed from the 123.18 close on Friday, but off the intraday top of 123.60. The performance of the dollar against the euro was less affected by the equity correction. EUR/USD closed the session at 1.0752 (1.0741 on Friday).

This morning, Chinese inflation data disappointed. Headline CPI inflation was reported at 1.3% Y/Y (1.5% was expected), while PPI inflation declined 5.9 Y/Y. Most Asian equities opened the session in the red. The low Chinese inflation numbers provided some temporary relief especially for Chinese equities as investors pondered the chances for more easing. However, this time the ‘’bad news is good news trick’ doesn’t really work. Most Asian equities show substantial losses. Commodities remain in the defensive, too. Even so, USD/JPY and EUR/USD are little changed respectively in the 1.0745 area and the 123.20 area at the moment of writing. The Aussie dollar is stabilizing in the 0.7050 area.

Today, there are again only second tier eco data on the agenda. Speeches from ECB members are key following yesterday’s rumours on an aggressive ECB deposit rate cut. We don’t expect ECB’s Coeure to give much info when he speaks today, as ECB discussions seems ongoing. The fear for aggressive ECB action is putting a solid cap on the topside of the euro. In the US the eco calendar is also of little interest. Only the NFIB small business confidence, has some modest market moving potential. It is expected to rise slightly from 96.1 to 96.5. Even a positive won’t change fortunes for the dollar. In a day-to-day perspective, sentiment on risk might turn for the worse. However, for now, the impact on the dollar and especially on EUR/USD is limited. So, some more consolidation after the recent strong USD gains might be on the cards. There is no trigger to really row against the USD positive tide.

In a broader perspective, the dollar has strengthened recently against the euro and the yen. Interest rate differentials at the short end widened in favour of the dollar. EUR/USD dropped below the key 1.0809 support and also reached the targets of the multiple top formation (neckline 1.1087/1.1105) in the low 1.0715 area. With policy divergence between the Fed and the ECB (and to a lesser extent also the BoJ) still in place, we don’t row against the USD uptrend. However, quite some good (interest rate) news is already be discounted. So, the pace of the USD rally may slow. The post ECB QE lows in EUR/USD (1.0521/1.0458 area) are the most obvious targets on the charts. We hold on to a EUR/USD sell-on upticks strategy for a retest of the cycle lows. For USD/JPY, the cycle tops in the 125.28/86 area come on the radar, but a (sustained) break won’t be easy short-term.

EUR/GBP: euro weakness prevails

On Monday, there was no big story about sterling trading. Cable traded with a slight upward bias during the European morning session. Call it a slight repositioning in the wake of Friday’s post-payrolls setback. The move halted temporary during the US trading session, but resumed as the dollar lost some ground due to declining equities later in the session. Cable closed the session at 1.5115 (from 1.5053 on Friday). EUR/GBP largely followed the intraday trading pattern of the EUR/USD headline pair. The pair held a tight sideways range in the 0.7130/55 area during the morning session, but declined toward the post payrolls low after the Reuter article on an ECB deposit rate cut. EUR/GBP closed the session at 0.7113 (from 0.7137 on Friday).

This morning, the BRC store sales came out at -0.2% Y/Y (a decline from 2.6 % Y/Y, while 0.8% was expected). The figure is a disappointment, but comes on the back of a strong September figure. As usual, there was hardly any reaction of sterling. Later today, there are no important eco data on the agenda. The UK labour market report, expected on Wednesday, will be key for sterling trading this week. Will a strong/decent report bring a BoE rate hike again on the radar?

Looking at the broader picture, the soft tone at the ECB press conference pushed EUR/GBP again lower in the longstanding sideways range. The pair tested the 0.7196 support and the level was ‘really’ broken after the FOMC announcement. A retest occurred last week after a soft BoE inflation report, but the test was rejected. We maintain a sell-on-upticks approach for EUR/GBP.

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