Dollar rally blocked

On Monday, markets started the week in a moderate risk-off modus as uncertainty on China persisted. Last week’s USD rally also ran into resistance.
However, the damage was limited. The US currency preserved most of the gains from last week’s rebound. The focus on the (currency) market is turning to the key US eco data which will be published later this week. During the US trading session, oil was squeezed sharply higher. However, this move had hardly any impact on the dollar. EUR/USD closed the session at 1.1211 (from 1.1185 on Friday). USD/JPY ended the day at 121.23, from 121.73.

Overnight, the Chinese PMI’s (both the official ones and the Caixin measures) point to an ongoing loss of momentum in the economy. The manufacturing indices of both series are in contraction territory and services growth is slowing. (Caixin Services PMI dropped to 51.5 from 53.8). According to a Bloomberg article, the PBOC might impose a reserve requirement on yuan forward transaction aiming to curb yuan speculation and capital outflows. The poor Chinese PMI’s and uncertainty on Chinese monetary and economic policy are keeping markets in risk-off modus.
Almost all Asian indices are trading with losses and volatility remains high. US equity futures are also sharply lower. This risk-off trade is taking some shine of the dollar.
EUR/USD is currently trading in the 1.1265/70 area. USD/JPY slipped below the 121 mark.

Today, the EMU manufacturing PMI and the German labour data will be published. The preliminary EMU PMI was little affected by the turmoil on financial markets. A big reaction on the currency market is unlikely unless the figure brings a sharp (negative) surprise. In the US, markets will keep a very close eye at the manufacturing ISM. A slight decline from 52.9 to 52.7 is expected. We see room for a limited rebound after last month’s setback. Such an outcome would keep the scenario of a September Fed rate hike intact and would in theory be moderately positive for the dollar. Of course, global market sentiment continues to play an important role for USD trading, too. This morning’s price action suggests that more risk-off price action might be a moderately negative for the dollar in a daily perspective. After last week’s rally, the day-to-day picture for the dollar now looks a bit less buoyant.

This week’s US data (ISM, ADP, payrolls) will be key for shaping the markets view on a September Fed rate hike. We think that the Fed is ready to raise rates in the near future, unless the data are really negative or in case market volatility rises sharply. This scenario should keep the downside of the dollar rather well protected. A EUR/USD sell-on upticks approach remains preferred. EUR/USD 1.1310/64 is a first short-term resistance.

In a longer term perspective, EUR/USD broke (temporary?) beyond the 1.1534 resistance (post-ECB QE top) early last week. This level was an important reference for our LT term EUR/USD short bias, which was questioned from a technical point of view. However, the EUR/USD rally was in the first place driven by global market factors (risk-off sentiment) rather than fundamental economic US and EMU news.
Despite this technical warning, we maintained the view that the economic and monetary context hasn’t changed in such a way that it calls for a big change in favour of the euro and against the dollar. That said, the risk-off logic can still pop up and trigger pockets of USD weakness. For now, we see 1.1017/1.1714 as the new trading range. Within this range, a cautious sell-on-upticks approach is favoured going into the Fed September policy meeting.

Sterling remains in the defensive

Sterling trading developed in thin market conditions yesterday as UK markets were closed for the summer Bank Holiday. The EUR/GBP pair initially hovered in the 0.7265/0.7300 area but sterling came again under pressure later in the US trading session. Remarkably, this setback occurred as oil rallied sharply at the same time. EUR/GBP closed the session at 0.7306 from 0.7268 on Friday. Cable initially hovered sideways in the lower part of the 1.54 big figure, but dropped back to just north of the key 1.5330 area. However, a break didn’t occur.

Today, UK calendar is quite well filled with the Money supply data (including credit statistics) and the manufacturing PMI. Credit data weren’t that bad of late. The manufacturing PMI showed a loss of momentum over the previous months, but there were signs of bottoming out last month (rebound from 51.4 to 51.9). For August a marginal increase to 52.00 is expected. We don’t have strong arguments to take a different view from the consensus.
The UK economic recovery is in the first place driven by domestic demand and by the activity in the services sector. So, the services PMI (published on Thursday) is probably more important for markets (and for the BOE). That said, we look out whether sterling can profit in case of decent/stronger than expected UK data.
BoE’s Carney at Jackson Hole repeated that a rate hike might come on the table of the BoE around the turn of the year. In this context, there is room for sterling to regain some ground against the euro and the dollar in case the eco data surprise on the upside of expectations. Despite recent sterling weakness, we maintain the view that the topside in EUR/GBP is rather well protected, with important resistance in the 0.7483/0.75 area. Interest rate differentials between the euro and sterling are still substantially in favour of the UK currency. A cautious sell-on-upticks approach might be considered.