Dollar resumes uptrend

On Monday, investors looked out for a potential reaction of global (currency) markets to the terror attacks in Paris. However, the reaction on most markets was modest. Early risk-off weakness in USD/JPY was reversed during the day. The dollar remained well bid further out in the US trading session as US equities extended gains. Weakness in commodities like copper and gold probably supported the dollar as well. EUR/USD closed the session at 1.0686 down from 1.0773. USD/JPY ended the session at 123.18, up from 122.61 on Friday evening.

Overnight, Asian equities extend the risk-on rally from the US yesterday evening. We didn’t see a specific trigger. The rebound is probably in the first place a technical correction on recent weakening. At the same time, industrial commodities like copper continue to suffer substantial losses. A risk-on context with at the same time a decline in a big part of the commodity complex proves to be a healthy context for the dollar. The decline of EUR/USD accelerated as the pair dropped below last week low (1.0675). The pair trades currently in the 1.0660 area. USD/JPY also continues trending north. The pair trades currently in the 123.40 area. Last week’s top of 123.60 is coming within reach.

Later today, the eco calendar contains the ZEW investor confidence survey. A stabilisation at 55.2 is expected. Expectations for a substantial ECB meeting are more or less cemented. So, there is probably a big deviation from consensus needed for the ZEW to have a lasting impact on EUR/USD trading. In the US, the calendar is well filled and contains the CPI, the real earnings, the production data and the NAHB housing market index. The CPI is the most important one for currency trading. Headline inflation is expected to ‘rebound’ to 0.2% M/M and 0.1% Y/Y. (from 0.0% Y/Y). Core inflation is expected at 0.2% M/M and 1.9% Y/Y (a similar reading as last month). We don’t have strong arguments to take a different view from the consensus. A lower than expected CPI figure could slow the recent ascent of the dollar. However, a big negative surprise is probably needed to change market expectations for a Fed rate hike in December.

In a day-to-day perspective, one can only take notice of the fact that sentiment on risk remains very solid despite the terrorist attacks in Paris. At least for now, this risk-on sentiment continues to support the dollar. Quite some Fed tightening and quite some ECB easing should already be discounted at the current levels. The trade-weighted dollar is less than 1.0% from the cycle top.
Even so, for now there is no trigger visible for a trend reversal, especially not in EUR/USD. So, we don’t row against the tide.

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 short-term 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 is coming on the radar, but a test/break looks difficult short-term.

EUR/GBP nearing the 0.70 barrier. CPI in focus

On Monday, there was again no consistent story about sterling trading, in a data-poor session. The constructive overall USD sentiment weighed slightly on cable. Today’s, UK CPI release might have weighed too. Cable closed the session at 1.5182, only marginally lower from the 1.5188 close on Friday. EUR/GBP mostly followed the EUR/USD price pattern. The early losses in Asia were soon reversed and the pair settled later in a sideways consolidation pattern mostly slightly north of 0.7050. However, an USD driven decline of EUR/USD finally pushed EUR/GBP back lower. The pair closed at 0.7030 (from 0.7066).

Today, the focus for sterling trading will be on the UK price data. Headline CPI is expected to remain unchanged, but still in negative territory (-0.1% Y/Y). Core CPI is also expected unchanged at 1.0% Y/Y. Ongoing low inflation in the months to come gives the BoE time to fend off calls for an immediate rate hike. This context is keeping sterling relatively weak against the dollar, but strong against an overall weak euro. We don’t expect this pattern to change soon. A higher than expected figure might stimulate the idea that the BoE could join the Fed sooner than expected. Such a scenario could be a additional positive for sterling. For now, euro weakness remains the key factor for EUR/GBP trading.

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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