Dollar holding tight ranges despite China driven swings

On Wednesday China-driven tensions eased during the European session. The risk-on sentiment caused temporary modest USD gains, but the move didn’t go far. Even more, sentiment on risk deteriorated in the US. US equities even closed the session with losses between 2% and 3%. This caused the dollar to reverse the intraday gains. The US currency even closed the session with slight losses, EUR/USD finished the trading day at 1.0877 (from 1.0858). USD/JPY closed at 117.68, almost unchanged from the previous close of 117.65. So, moves in the major USD cross rates were small given the swings in equities.

Overnight, most Asian equities show substantial losses. Japan underperforms (losses of 2.5%+). That said, the damage on other Asian markets and in China (gains up to 3.0%) could have been worse given the sharp decline in the US. As was the case over the previous days, the PBOC kept the fixing of the onshore yuan little changed. However, the offshore and the onshore yuan are losing ground this morning. The Hong Kong dollar is also under pressure and trades at the lowest level since March last year. Brent oil dropped below $30/b. The commodity currencies are also under pressure. AUD/USD trades again below 0.70 (0.6950 area). NZD/USD dropped below 0.65.The Canadian dollar set a minor new multi-year low against the US dollar. As was the case earlier this week, the moves in the likes EUR/USD (currently 1.0883) and USD/JPY (currently 117.50) are modest given the big swings in equities and the global uncertainty.

Today, the eco calendar is again only moderately interesting. The German statistical office will give a first estimate of the overall 2015 GDP growth. In the US the import prices and the weekly jobless claims will be published. We expect the data to be only of intraday significance for USD trading, at best. So USD traders will again look for guidance from global market moves, even as the direct impact on the dollar was modest of late.

In a day-to-day perspective, the price action on the US equity markets yesterday evening and in Asia this morning suggests that the China-induced market turmoil isn’t over yet. In theory, this is a negative for the dollar.
However, over the previous days USD/JPY and EUR/USD held within relatively tight ranges, despite the swings in global sentiment. It is still early days, but US equity futures currently also indicate no further losses. Our best guess is that the stalemate in EUR/USD and USD/JPY might persist today; maybe with the risk of some limited intraday loss for the dollar. However, we see no trigger for the dollar to break out off the recent well-established ranges. We still look/prefer to sell EUR/USD higher in the trading range (closer to 1.10/1.11).

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 moved into oversold territory and now tries to put a bottom in place.

How much BoE softness is discounted in sterling?

Yesterday there were no UK eco data to guide sterling trading. Sterling initially profited slightly from the improvement in global sentiment. However as was the case for the dollar cross rates, the ‘risk-on’ gains of sterling couldn’t be extended. Sterling even lost a big part of the earlier gains as risk-off returned and as oil declined. Investors remained also reluctant to be long sterling into today’s BoE decision/minutes. EUR/GBP closed the session at 0.7550 (from 0.7516 on Tuesday). Cable ended the trading session at 1.4407 (from 1.4448). So, the UK currency held within reach of the recent lows.

Today, the BoE will decide on its policy and at the same time announce the Minutes of the meeting. The policy rate and the stock of asset purchases are widely expected to remain unchanged. Since the December meeting most UK activity data show some loss of momentum, with retails sales the exception to the rule. Wage growth disappointed even as employment continued to expand. Headline inflation was unchanged at 0.1% Y/Y, but the further decline in oil prices suggests that inflation can stay low for longer than anticipated until now. The decline of sterling is one of the only factors pointing in the other direction regarding the inflation risks. However, the broader picture suggests that the risks to the BoE inflation scenario are tilted further to the downside. So, the BoE can hold a soft tone and hold its wait-and-see approach. Markets will look out whether BoE’s McCafferty will still vote for a rate hike.

Regarding sterling trading, we assume that a soft BoE scenario is more or less discounted at current levels of sterling and for short-term interest rates.
However, aside from the BoE rate hike expectations, the uncertainty on Brexit and global sentiment are also important drivers for sterling. As these issues won’t be solved anytime soon, we don’t see a trigger for a sustained sterling rebound. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Next resistance stands at 0.7593 (Feb 2015 top). Sterling is in oversold territory against the euro and the dollar, but it is no good enough a reason to rush into sterling longs yet.

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