Cable hammered below the 1.50 barrier

USD losing ground slightly on poor US ISM

On Wednesday, the balance on the currency market tilted in the disadvantage of the euro and in favour of the dollar. The EMU CPI was lower than expected, fuelling speculation of aggressive ECB easing today. On the dollar side of the story, the ADP labour market report was very strong. Later in the session, Fed’s Yellen confirmed the intention for a December lift-off. The trade-weighted dollar touched a minor cycle top (100.51 area). EUR/USD also, touched a minor short term low in the 1.0550/55 area. At the same time, Yellen hinted that further hikes will depend on actual progress in inflation.
This was slightly dovish suggesting a gradual rate hike cycle. The Fed beige book remained cautiously positive on the US economy and on wages, but didn’t bring much new. The dollar eased after the initial Yellen spike. EUR/USD closed the day at 1.0615 (from 1.0633). USD/JPY ended the day at 123.24 (from 122.87).

This morning, most Asian equities traded with modest losses joining the decline in the US. The Chinese Caixin services PMI declined from 52.00 to 51.2. Even so, Chinese equities slightly outperformed the rest of the region. The hint from Yellen on a December rate hike is weighing on commodities and commodity related assets. The Aussie and the Kiwi dollar are trading off the recent highs, but hold up reasonably well. The dollar is holding strong against the euro and the yen. USD/JPY is changing hands in the 123.45 area. EUR/USD trades in the well-known 1.0585/90 area.

Today, there are plenty of interesting eco data and events. In Europe, the final services PMI will be published and the ECB will hold its key policy meeting. In the US, the jobless claims, the factory orders and the Non-manufacturing ISM will be published. At CET 16.00, Yellen will testify before the Joined Economic committee. The ECB policy decision and the Yellen testimony are key for markets. A substantial ECB easing is largely discounted in markets. For the technical factors and the fixed income part of this report.
The amount of the reduction in the deposit rate might be key for the currency. A further reduction of the deposit rate by more than 10 bp (-30% or lower level) might be an additional negative for the euro. In case off a cut by 10 bp or less, some short-term profit taking on euro shorts might be on the cards.

Regarding the speech of Yellen before the JEC, we expect Yellen to hold the modestly hawkish tone from Yesterday’s speech. We look out whether she gives an assessment on the recent strength on the dollar. We expect any repositioning in the interest markets to occur at the long end of the curve. The idea of ongoing policy divergence and substantial interest rate differentials at the short end of the curve won’t change anytime soon. A deeper negative deposit rate should cap the topside in EUR/USD. So, a short-term repositioning/rebound of the euro is possible e.g. in case of a ‘small’ cut in the deposit rate. Even in that scenario we expect the EUR/USD rebound to run into resistance quite soon. The 1.08/1.0830 is a first short-term resistance. After the ECB and Yellen, markets will also look forward to tomorrow’s payrolls. After the strong ADP report, investors might still be a bit reluctant to be USD short going into the Payrolls.

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.

Cable hammered below the 1.50 barrier

On Wednesday, sterling performed again poorly, both against the euro and the dollar. The UK construction PMI was substantially weaker than expected (decline from 58.8 to 55.3, 58.5 was expected). This was a good enough reason for some additional sterling selling. EUR/GBP spiked temporarily to the 0.7065 area after the publication of the report, but dropped back to the 0.7030 area after the EMU CPI.
However, this ‘sterling rebound’ was short-lived. EUR/GBP returned very soon north of the 0.7050 area, even as EUR/USD declined after the strong ADP report. Later in the session, the decline of cable even accelerated after the break below the 1.50 area. Cable underperformed EUR/USD in the post-Yellen moves. EUR/GBP closed the session at 0.7099 (from 0.7050).Cable ended the day with a big loss at 1.4951 (from 1.5082). Today, sterling traders look out for the UK Services PMI. A stabilisation at 55.00 (from 54.9) is expected. Over the previous days, the manufacturing and the construction measure were weaker than expected. The prospect of further ECB easing is also pushing BoE rate hike expectations further out in the future. A new disappointment in the services PMI might be an additional negative for sterling short-term. That said, in a longer term perspective, we don’t see a good reason for a sustained rebound of the euro against sterling unless the ECB easing would be much less than expected.

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