USD losing ground slightly on poor US ISM

On Tuesday, the dollar fell prey to limited profit taking against the euro. There were already tentative signs of dollar softness in Asia. The USD correction accelerated temporary as the ISM of the manufacturing sector dropped below the 50 boom-or-bust mark. However, investors remain reluctant to really change course on the recent EUR/USD decline ahead of the ECB meeting. EUR/USD closed session at 1.0633 up from 1.0565 on Monday. The decline of USD/JPY was modest as US equities performed well. USD/JPY closed the session at 122.87 from 123.11 on Monday.
Overnight, Fed’s Brainard spoke soft and indicated that there was not that much room for Fed to tighten monetary policy. She also indicated that a 1% rate cut would be needed to counter balance the impact of the strong dollar. For now the soft Fed speak and the weak ISM have only a limited negative impact on the dollar. EUR/USD is off yesterday’s correction top and trades in the 1.0610 area. USD/JPY regained the 123 barrier. Asian equities are trading mixed.
Tentative USD weakness supported US equities yesterday, but the impact on of a potential weaker dollar on Asian markets is less clear.
Q3 GDP growth in Australia was reported at 0.9% Q/Q and 2.5% Y/Y, slightly ahead of expectations. The Aussie dollar is holding just north of 0.73 area, but there are no additional gains. The good Q3 GDP was no big surprise anymore after yesterday’s Q3 export data. The Aussie dollar is also ceding slightly ground as the US dollar reverses part of the yesterday’s losses this morning.

Today, the EMU CPI will be published. Headline inflation is expected to rise from 0.1%Y/Y to 0.2 Y/Y. Core inflation is expected stable at 1.1% We don’t have reasons to take a different view from the consensus. The report probably won’t change market expectations on tomorrow’s ECB policy decision. An in line or weaker than expected outcome might be a slightly negative for the euro. In the US, the ADP labour market report is expected to show private employment growth at 190 000. The bar of the consensus is quite high. However, yesterday’s price action indicates that the investors are reluctant to sell the dollar, even in case of disappointing US data, ahead of tomorrow’s ECB meeting. This might still be the case today. After the close of the European markets, Fed’s Yellen will speak on the economy and the Fed will publish the beige book. We don’t expect Yellen to really amend the communication on a December rate hike ahead of the payrolls. If so, it might be a slightly positive for the dollar. In a day-to-day perspective, we expect no real change of the recent USD trading pattern ahead of tomorrow’s ECB meeting. The data and speech might cause some intraday volatility, but in the end we expect the dollar to hold near the recent highs, both against the euro and the yen. To put it another way, euro caution will remain in place due to expected ECB easing.

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 came on the radar, but a test looks difficult short-term.

Sterling continues to trade weakish

On Tuesday, sterling trading was driven by conflicting factors. Early in the session the global dollar ‘correction’ prevailed. Cable rebounded north of the 1.51 level early in European dealing. In this USD correction cable even slightly outperformed EUR/USD, pushing EUR/GBP to the low 0.70 area. The UK manufacturing PMI drop from 55.2 to 52.7. The consensus expected only a drop to 53.6. Sterling lost some ground after the publication of the report, but the losses were limited. Both cable and EUR/GBP settled in a sideways range respectively in the high 1.50 area and the 0.7020 area. During the US trading session, sentiment on sterling remained rather soft. Cable hardly profited from the poor US ISM. The pair closed the session at 1.5082 (from 1.5056). EUR/GBP drifted higher in line with EUR/USD and closed the session at 0.7052 (from 0.7053)

Today, only the UK construction PMI will be published. A slight setback from 58.8 to 58.5 is expected. This is still a very healthy level, we expected the report only to be of intraday significance for sterling trading. Global factors will drive sterling trading. Over the previous days, momentum in sterling was a bit weakish. This might continue today .

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. We maintain a cautious 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.

•  Download Full Sunrise Market Commentary Currencies