EUR/GBP testing the 0.7026 support

Dollar losses stay modest as sentiment remains risk-off

On Friday, the data were mixed, mostly slightly weaker than expected. EMU Q3 growth was reported at 0.3% Q/Q (0.4% expected). US retail sales and PPI also missed expectations. Equities in Europe and in the US were under pressure but the impact on the dollar was not that straightforward. Markets apparently concluded that the data won’t change the assessment of the ECB and the Fed. EUR/USD closed the session at 1.0773 from 1.0814. USD/JPY ended the day at 122.61, unchanged from the previous day.

Overnight, Asian equities trade mostly with moderate losses. The attacks in Paris maybe caused some additional investor caution. However, the price action is probably in the first place due to a poor risk sentiment in the US on Friday. This morning, the Japan Q3 GDP was reported at -0.2% Q/Q, slightly weaker than the consensus of only a 0.1% contraction. Investments and inventories were to blame. The report technically brings Japan in a recession as Q2 growth was also negative (-0.2% Q/Q). The direct impact of the GDP data on markets is limited. Losses of Japanese equities are even slightly lower than in the rest of the region. At the same time, the yen strengthened slightly due to the global risk-off sentiment and may also due to the Paris attacks. USD/JPY is changing hands in the 122.40 area. EUR/USD dropped briefly below 1.07 this morning, but trades currently again in the 1.0725 area. On Friday, the staff of the IMF concluded that the yuan met the criteria of being freely usable and being widely used for international transactions. The statement was openly endorsed by IMF Chief Christine Lagarde. The assessment opens the way for the Yuan to be included in the IMF SDR basket as a reserve currency.

Later today, the eco calendar is thin. In Europe, final EMU CPI will be published. A slight downward revision for the headline figure is expected (consensus at 0.1% M/M and 0.0% Q.Q). Core inflation is expected stable at 1.0%. A lower figure might be a slightly negative for the euro. In the US, the Empire manufacturing index is expected to improve from -6.35 to -11.36. Several ECB members will speak again today. We expect the impact to be limited and short-lived. Of late, an outright risk-off sentiment was mostly a negative for the dollar, but the negative impact on the US currency was often moderate and not really consistent. In a day-to-day perspective, we expect the risk-off sentiment to weight slightly on USD/JPY. The picture for EUR/USD is less clear. We assume that the topside of the pair remains tough. A continuation of the gradual downtrend is likely.

In a broader perspective, short term interest rate differentials widened in favour of the dollar. EUR/USD dropped below the 1.0809 support and reached the targets of the multiple top formation (neckline 1.1087/1.1105) in the low 1.0715 rea. With policy divergence between the Fed and the ECB still in place, we don’t row against the USD uptrend. However, quite some news (interest rate) is already discounted. So, the pace of the USD rally may slow. The post ECB QE lows in EUR/USD (1.0521/1.0458 area) are obvious targets on the charts. We maintain 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 came on the radar, but a test break looks difficult short-term.

EUR/GBP testing the 0.7026 support

On Friday, there were only second tier UK eco data. September construction output was below consensus, but had no impact on trading. Cable hovered sideways in the lower 1.52 area during the European morning session.. The pair spiked briefly higher after the mid-morning US data (temporary weakness), but the move was soon reversed. EUR/GBP to a large extent tracked again the price pattern of EUR/USD. EUR/GBP closed the session at 0.7066 (from 0.7099 on Thursday).

This morning, the UK November Rightmove House prices declined 1.3% M/M to be up 6.2% Y/Y. The report had no big impact on Sterling trading. However, global euro weakness at the start of the session also pushed EUR/GBP for a test of the 0.7026 area. Later today, there are no important UK eco data. Global dollar sentiment will remain the key driver for sterling trading. Risk-off sentiment might be a slightly negative for the dollar, but the downside of the US currency against the euro and sterling will probably be limited. We expect EUR/GBP to hold close to the recent lows.

Looking at the broader picture, the soft stance of the ECB 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 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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