Trade-weighted nearing cycle top

On Monday, the dollar remained strong and the euro stayed in the defensive, even as the EMU PMI’s were fairly strong. Oil rebounded and supported temporary the likes of the Norwegian Crown and the Canadian dollar, but the impact on the US currency was limited. EUR/USD even touched a minor new low just below 1.06. The pair closed the session at 1.0636, only marginally lower compared to Friday’s close of 1.0646. USD/JPY end the session little changed at 122.84 from 122.81.

Overnight, Asian equities show no clear trend as US markets reversed opening gains an closed almost unchanged. Commodity stocks remain under pressure as industrial commodities stay close to the recent lows. AUD/USD stabilizes close to the 0.72 level. Yellen in a letter to savers repeated that any Fed tightening after the lift‐off would be very gradual. However, this is not really big news for markets. Yesterday evening, ECB’s Lautenschlaeger did break ranks with the mainstream ECB talk as she said that there is currently no need for further easing as the European economy has shown resilient against global uncertainty. EUR/USD trades currently in the 1.0625 area. USD/JPY returned below the 123 barrier and is changing hands in the 122.70 area.

Today we look out for the German Ifo business climate. The headline IFO figure is expected unchanged at 108.2. Will yesterday’s strong PMI be confirmed? The Lautenschlaeger comments suggest a (small) rift in the ECB on the need for further easing. However, we don’t expect the market to change its assessment on further substantial ECB easing, even in case of strong EMU data. In the US, Consumer confidence is expected to improve from 97,6 to 99,5. We see upward risks for this indicator. The Richmond Fed manufacturing index is also expected to improve. So, the odds don’t look that bad for the dollar today. Of late, the intentions of the ECB and the Fed were clearly indicated by several central bank officials. Still currency markets continued to play the divergence trade. At the current levels, a lot of good news should already be discounted for the dollar. The trade‐weighted dollar is coming close to the cycle highs reached earlier this year. At the same time, anticipation on aggressive ECB easing continues to weigh on the euro. We keep a close eye at the short‐term interest rate differentials (2‐yr) between the US and Germany. They maintained an albeit gradual uptrend. If the widening halts, the decline of EUR/USD might slow. 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 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.

Sterling slightly in the defensive before BoE hearing

On Monday, there were no important data in the UK. Cable traded with a negative bias and slightly underperformed EUR/USD. The test of EUR/GBP below 0.70 was again rejected. Sterling investors perhaps took a cautious approach ahead of today’s BoE hearing before a Treasury committee as they expect BoE’s Carney to stay muted on the timing of a rate hike. Whatever the reason, sterling traded slightly weaker against the euro and the dollar. EUR/GBP closed the day at 0.7033 vs 0.7009 on Friday. Cable ended the session at 1.5124 from 1.5191.

Today, the CBI reported sales are expected to improve from 19 to 25. After volatile official retail sales figures of late, a number in line with the consensus would indicate that UK sales are doing OK. However, we don’t expect a big reaction to this report. The focus for sterling trading will be on a hearing of the BoE on the November inflation report before a Treasury Committee. The inflation report was soft as the BoE expected inflation to stay low for longer. However, last week, BoE Broadbent indicated that UK market yield curves were very flat and that expectations on the timing of a BoE rate hike could change due to incoming data. We expect Carney to maintain the line that the BoE has time to watch the data. It shouldn’t be in a hurry to raise rates as inflation remains very low. The prospect of more ECB easing and its negative impact on the euro is also a good reason for the BoE to stay in wait‐and‐see modus. The BoE hearing might be slightly negative for sterling in a daily perspective. However, market expectations for a first BoE rate hike are already very low. So, we don’t expect a sustained decline of sterling against the euro. Sterling might stay weak against the dollar. The correction low at 1.5027 comes within reach.

Looking at the broader picture, the soft ECB stance pushed EUR/GBP lower in the longstanding sideways range. The pair cleared the 0.7196 support after the October FOMC meeting. 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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