Risk-off and neutral BoE stance weigh on sterling

Risk-off triggers modest USD correction

On Tuesday, markets turned into risk-off modus due to the incident between Russia and Turkey. This risk-off trade blocked the rise(in short-term) US yields and triggered a moderate profit taking move in the dollar. However, for now it’s just that: a limited setback on recent USD strength. The dollar correction even slowed later in the session as US equities reversed earlier losses.
EUR/USD closed the session at 1.0643 (from 1.0636). The losses in USD/JPY were a bit more substantial. The pair ended the day at 122.53 (from 122.84).

Overnight, most Asian indices trade mostly with modest losses. The fall-out from the Turkey/Russia incident remains modest. China lifting some restrictions on brokerage activity has no negative impact on Chinese equities. Chinese indices even slightly outperform. The tensions between Russia and Turkey have a mixed impact on commodities. The likes of oil and gold remain well bid. The picture for industrial commodities is more mixed. Even so, commodity currencies like the Aussie dollar, the kiwi dollar and the Canadian dollar gain further ground against the USD. USD/JPY is under moderate pressure due to a cautious risk-off sentiment. The pair trades currently in the 122.35 area. The BOJ minutes kept a balanced tone and suggests that the bank is in no hurry to ease policy further. EUR/USD set a minor new ST correction top at 1.0675 this morning, but is currently again trading in the 1.0660 area.

Today, there are few eco data in Europe but the calendar in the US is well packed. Several eco releases are published earlier ahead of Thanksgiving/Black Friday. We keep an eye at the spending in income data (and the core PCE), the durable orders and Jobless claims. A big negative surprise might be a slightly negative for the dollar. However, we doubt that today’s data will question the scenario of a Fed rate hike. So, the (negative) impact on the dollar should be limited. Global risk sentiment and, to a lesser extent, the performance of commodities, will set the tone for USD trading. Uncertainty won’t disappear at once, but it looks that the Russia/Turkey tensions will not spiral out of control.
This might limit a further correction of the dollar. Of late, currency markets continued to play the divergence trade. A lot of good news was already discounted for the dollar. So, a correction was overdue. The Turkey/Russia incident provided a good excuse for a correction/slowdown of the USD rally. We look out whether this correction will continue today. For now, we don’t expect it to go very far.

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. For USD/JPY, the cycle tops in the 125.28/86 area are coming on the radar, but a test looks difficult short-term.

Risk-off and neutral BoE stance weigh on sterling

On Tuesday the focus for sterling trading was on the BoE testimony before a Treasury committee. However, the hearing didn’t bring much new for markets. Carney didn’t give specific details on when he expected the BoE to raise rate.
Other members kept their usual bias (Forbes on the hawkish side; Haldane on the dovish side). CBI reported sales were substantially weaker than expected, but there was no reaction of sterling. Still the UK currency traded with a negative bias against. The wait-and-see stance of the BoE caused some profit on sterling longs against the euro. The risk-off sentiment (Russia-Turkey incident) was more supportive for the euro (and to a lesser extent for the dollar) and a negative for sterling. EUR/GBP closed the session at 0.7056 (from 0.7033).Cable ended the day at 1.5084 (from 1.5124).

Today, only the BBA loans of home purchases will be published. A round to 45500 is expected. Any impact on sterling will only be of intraday significance, at best. Yesterday, a neutral BoE stance, a risk-off context and some Brexit fears weighed on the UK currently. Question is whether/how far this correction will go. Cable might remain vulnerable. For EUR/GBP, we assume that the correction won’t go very far with the ECB meeting looming in the horizon.

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. The correction low at 0.6982 has become an interim support.

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