EUR/GBP breaks key 0.7493 resistance

Dollar still looking for a bottom despite strong payrolls

On Friday, the decline of the dollar took a breather as the imminent stress from the China crisis eased and as investors counted down to the US payrolls report. The payrolls were strong with 292 000 additional jobs in December and strong other detals. The dollar gained temporary a few ticks against the euro and the yen, but the gains were already erased a couple of minutes later: very disappointed for the dollar. Equities resumed their downtrend as global uncertainty prevailed. EUR/USD closed the session at 1.0922 (from 1.0932 on Thursday). USD/JPY ended the day at 117.26 (from 117.67).

This morning, the decline of Asian/Chinese equities resumed. During the weekend, the China CPI rose slightly to 1.6% Y/Y, in line with expectations. However, markets focused on the December PPI, stabile at ‐5.9%, while a slightly ‘rise’ to ‐5.8% was expected. It was the 48th negative reading in a row. The PBOC set the fixing of the yuan reference rate marginally stronger. Market speculation on a protracted depreciation of the yuan was an important source of market uncertainty of late. However, today’s PBOC action still wasn’t enough to remove this uncertainty. The risk‐off trade persists. Oil (32.76$/barrel, near low) and other commodities (copper new low) stay under pressure. In thin liquidity conditions, the South African rand fell off a cliff this morning, touching new all‐time lows against the euro and the dollar. The dollar opened under modest pressure against the euro and the yen but the initial losses are reversed even as Asia equities stay in the red (Shanghai ‐3%). EUR/USD trades in the 1.0915 area; USD/JPY in the 117.35 area.

Today, there are no important eco data in the US or in Europe. Fed’s Lockhart and Fed’s Kaplan will speak on the US economy. The risk‐off trade in Asia persist, but US equity futures are currently little changed ahead of the start of the earnings season. So, the jury is still out whether the risk‐off trade persists later today and how it affects the dollar. Our best guess is that USD trading will be mainly technical in nature and confined to tight ranges. The global calendar is back loaded this week (Chinese trade data and US retail sales and PPI).

For now, China driven volatility isn’t over yet. Earlier last week, we ignored the EUR/USD decline, even as the technical picture turned negative after the break below 1.08. We look to sell EUR/USD higher in the trading range (e.g closer to the 1.10/1.11 area) and are gradually coming closer to this resistance area (EUR/USD touched 1.0970 this morning). So, is the dollar able to build a bottom, allowing us to reestablish USD long positions?.

From a technical point of view, EUR/USD failed to regain important resistances at 1.1087 (breakdown) and 1.1124 (62% retracement from the October high). Last week, EUR/USD failed to sustain below 1.0796 support (07 Dec low). Next support is at 1.0650 (76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.1004 (reaction top) is a first reference. Next resistance comes in at 1.1060/1.1124 (15 Dec top/62% retracement) The picture for USD/JPY remains negative below 120. Next support comes in at 116.18 (August low). The pair is moving into oversold territory and this morning’s price action looks like a shortterm exhaustion move, but confirmation is needed.

EUR/GBP breaks key 0.7493 resistance

On Friday, the easing of the China crisis brought UK markets and sterling temporary in calmer waters. The UK external trade data were slightly disappointing, but largely ignored. The global market reaction to a good US payrolls report was disappointing. The global risk‐off trade resumed and weighed on sterling. Lingering uncertainty on Brexit continued to weigh on sterling. EUR/GBP closed the session at 0.7529, breaking above the key 0.7493 resistance. Cable set also a multi‐year low and closed the session at 1.4517.

Today, the UK calendar is empty. On Thursday, the focus will be on the UK production data and, even more, on the BoE policy meeting and the Minutes of that meeting. A loss of momentum in UK activity (especially in manufacturing), ongoing low headline inflation and modest wage growth and global uncertainty are good reasons for the BoE to keep a wait‐and‐see modus on a first rate hike. This is weighing on sterling. Part of the less positive news should already be discounted after the recent sterling decline. A sustained rebound will be difficult unless there is progress in the Brexit debate or unless risk sentiment improves. The break of the EUR/GBP 0.7493 Oct top is a negative for sterling. Next resistance stands in at 0.7593 (Feb 2015 top). Sterling is moving in oversold territory against the euro and the dollar, but for now it is no good enough reason to rush into sterling longs.

•  Download Full Sunrise Market Commentary Currencies