EUR/GBP holds near the recent lows

Dollar holds strong

On Friday , there were no eco data with market moving potential in Europe and in the US. ECB Draghi reiterated that the ECB will do everything needed to reach its inflation target. EUR/USD returned below 1.07 after his quotes. Later in the session, the dollar was again better bid. 2‐yr interest rate differentials between the US and Germany hit a new cycle top at 131 bps. EUR/USD came within reach of the recent low, but a real test didn’t occur (yet). The pair closed the week at 1.0646, from 1.0734 on Thursday. USD/JPY ended the week at 122.81 (Thursday’s close at 122.87).

Overnight, most Asian equities trade with modest gains. New rules on leveraged buying of Chinese equities apparently have no big negative impact on Chinese stocks. Commodity weakness and USD strength are the most striking features for trading this morning. During the weekend, SF Fed Williams said that there is a strong case for a Fed rate hike at the December meeting. The new down‐leg in commodities leaves its traces on the Aussie and the kiwi dollar. AUD/USD dropped again below the 0.72 barrier this morning. Broad based USD strength pushed EUR/USD to a new short‐term. The pair is currently trading in the low 1.06 area. USD/JPY rebounded too and trades again north of the 123 big figure.

Today, the advance reading of the EMU November PMI’s will be published. The report is expected close to last month’s. The EMU composite PMI is expected at 54.0 (from 53.9). The figure confirms decent growth in EMU in Q4. Even so, the report won’t change the ECB’s assessment of downside risk to the economy and to inflation. A big positive surprise (which we don’t expect) is probably needed to have any positive effect on the single currency. In the US, the Chicago Fed national activity index and the existing home sales will be published. Both data series are usually only of intraday significance for USD trading, at best. Of late, the ECB and the Fed already clearly communicated their intentions for their respective policy meetings in December. Still currency markets continue to play the divergence trade. At the current levels, a lot of good news should already be discounted for the dollar. CFTC statistics also suggest that the market is positioned short EUR/USD. At the same time, anticipation on aggressive ECB easing continues to weigh on the euro. This was again illustrated by the market reaction to ECB Draghi’s comments on Friday. We keep a close eye at the short‐term interest rate differentials (2‐yr) between the US and Germany. If the widening halts, the decline of EUR/USD might slow. Also keep an eye at commodities. At the end of last week, it looked that the downside pressure on some commodities eased a bit, but the downtrend apparently resumes. This might be a slight additional supportive for the dollar short‐tem. A slowdown/ST consolidation of the USD rally still looks likely in the run‐up to the ECB and Fed policy meetings as markets have already discounted quite some Fed tightening/ECB easing. Even so, we expect any USD correction to remain limited/short‐lived.

From a technical point of view, 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 area. With policy divergence between the Fed and the ECB still in place, we don’t row against the EUR/USD downtrend, but 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 are coming on the radar, but a test looks difficult shortterm.

EUR/GBP holds near the recent lows

On Friday, trading in the major sterling cross rates was mainly driven by technical considerations. The early morning, Draghi‐driven, decline of the euro pushed EUR/GBP back below the 0.70 level. However, later in the session, cable also faced selling pressure as the dollar remained in a rather good shape across the board. UK monthly public finance data were disappointing but as usual largely ignored. Cable closed the session at 1.5169, down 1 big figure from Thursday. EUR/GBP ended the day at 0.7009 (from 0.7020).

Today, there are again no important data on the calendar in the UK . At the start of the new week global dollar strength still looks to be the name of the game. This is a negative for cable. At the same time, the decline in EUR/USD will probably continue to be a moderately negative for EUR/GBP. So, the recent lows in the 0.6982 area might come again under pressure. Sterling traders will look forward to a hearing of several BoE members, including BoE’s Carney, before a UK Treasury Committee on Tuesday.

Looking at the broader picture, the soft stance of the ECB pushed EUR/GBP again lower in the longstanding sideways range. The pair cleared a first support at 0.7196 after the October 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 as euro weakness prevails. Next key support is this year’s low at 0.6936.

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