EUR/USD rebound aborted, but no convincing dollar

On Thursday, calm returned to the market in the absence of interesting eco data or event news. Commodities and equities moved sideways to higher (US equities). At the same time, the US dollar showed a mixed picture. EUR/USD reversed a substantial part of yesterday’s impressive rebound. USD/JPY continued to struggle though after the break below the short-term range bottom (122.25) yesterday. USD traders are looking for a consistent story which isn’t there right now, as moves are erratic and driven by pre FOMC positioning. Short-term interest rate differentials between Germany and the US (127 bps for the 2-yr) widened again. Even so, the decline of EUR/USD today looked more due to technical euro selling. The ‘rebound’ of USD/JPY was not at all convincing and evaporated soon. In a daily perspective, EUR/USD closed at 1.0942, a 83 ticks loss versus previous close, while USD/JPY was marginally up to 121.55 from 121.45 previously.

Overnight, Asian equities trade lower again, but losses are small to moderate. Japanese equities eke out some gains. Overall, the dollar seems a tiny bit stronger this morning after a good rebound yesterday. EUR/USD trades unchanged, but commodity currencies and USD/JPY strengthens and the latter changes hands currently at 122.10 from 121.51 yesterday eve. BOJ Kuroda said inflation will rebound to 2% next year once the effect of lower oil prices fades. However that’s doubtful as the trade weighed yen is up quite substantial in past months. So overall, we think that Asian trading doesn’t give us clues for FX trading in Europe later on.

Today, the US eco-calendar is interesting with the November retail sales & PPI and the December Michigan consumer sentiment. The US retail sales for November are expected to have improved slightly, but we side with the market consensus. Producer prices (PPI) are expected to have remained quite negative at -1.4% Y/Y, while the core PPI should have gone a tad higher to 0.2% Y/Y. The University of Michigan sentiment indicator for December is expected to improve to 92.0, coming from 91.3 previously. We see downward risks for the data which is a dollar negative. Even so, global market sentiment and investor repositioning ahead of the Fed meeting will prevail for FX trading.

This week, the reaction function of the dollar was not consistent at all. Initially, downside pressure on oil and nervousness on global equities weighed on the dollar. It dropped below important support against the euro and the yen on Wednesday. However, the dollar’s ‘behaviour’ changed again yesterday and this morning. The US currency rebounded nicely even as equity sentiment remains fragile and as oil set news cycle lows. US/German 2-yr rate differentials (128 bp) moved again slightly in favour of the dollar. So, the dollar trades with a positive bias this morning. Yesterday’s USD rebound gives some comfort for USD bulls. Still , we stay cautious to buy the dollar as risk sentiment remains fragile. In a longer term perspective, the debate has shifted to the pace of further Fed tightening after next week’s Fed meeting as the ECB is done for now. It might still take some time (and good US eco data) for the dollar to regain further ground. However, policy divergence has probably still to play a role.

From a technical point of view, EUR/USD cleared earlier this week the 38% retracement from 1.1714 to 1.0524 standing at 1.0979, making the picture again neutral. We are currently again below that level, but it doesn’t improve the picture. For that to occur, a sustained decline below 1.08 is needed to improve the technical picture for the dollar. On the upside, a previous range bottom/break down area comes in at 1.1087 (resistance1) and finally the 62% retracement from the October high at 1.1124 (resistance 2). If broken, it would make the picture dollar bearish and open the way to the 1.15 landmark.
However, after Wednesday’s rather swift decline of the dollar, we want signs of stabilisation before reselling EUR/USD. USD/JPY tries to recoup the bottom of previous bottom in the 122.25 area, which if confirms should make the picture again neutral.

BoE maintains a soft tone. So does sterling

Yesterday, sterling trading was driven by two ‘different stories’. In the morning, it was driven by the global markets’ story. Selling pressure in the dollar eased and cable settled in a tight range mostly slightly below 1.52. EUR/GBP dropped from the mid-0.72 area to the low 0.72 area as the euro returned part of yesterday’s rally. The BoE’s policy decision temporarily changed the trading pattern. The Bank as expected left its policy rate unchanged. At the margin, the inflation assessment was slightly softer, but overall confirmed that inflation would remain subdued for some time to come. The BoE minutes triggered a modest and temporary setback of sterling that was reversed later on. Cable closed little changed around 1.516, while EUR/GBP fell to 0.7212 from 0.7259 previously.

Today, the UK calendar contains the October construction output and the BoE/GfK inflation expectations. We don’t expect these to be of lasting importance, even if the inflation expectations are worthy looking at. So, sterling crosses will be dominated by moves in the major FX pairs and the technicals. Euro weakness helped sterling becoming stronger yesterday, but after the steep losses of past sessions, that’s not enough to become more positive on sterling. We first want to see real sterling strength, it’s unlikely that we’ll get it today. A sustained drop below 0.72 would be a positive, but we would remain cautious ahead of the FOMC meeting and probably also afterwards as trading will rapidly thin going towards year-end. Sterling is a tad weaker overnight. Technically, the pair is still in a broad sideways range with boundaries between 0.6938 and 0.7483.

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