EUR/USD decline slows as global bond rally continues

Yesterday, the ‘post-Jackson hole’ selling of the euro halted. With no big news on the agenda, EUR/USD settled in the upper half of the 1.31 big figure for most of the day. Global downside pressure on (core) bond yields prevented further dollar gains too. During the US trading session, EUR/USD even regained the 1.32 level. USD/JPY returned below the 104 big figure.

Overnight, most Asian equity indices are drifting into negative territory. Negative headlines from the Chinese property market probably played a role. The cautious risk-off sentiment and the ongoing strong save haven bid in core bonds is a (slightly) negative for the dollar. USD/JPY is again losing a few ticks, trading in the 103.75 area. EUR/USD is trading in the 1.3210/15 area.

Later today, the calendar is much better filled than earlier this week. .In Europe we look out for the EC confidence data, EMU money supply, German labour market data and the German (Belgian & Spanish) August inflation data. EC confidence data will probably be soft. However, with the ECB QE debate taking centre stage, the focus will be on the German inflation data. The consensus expects 0.0% M/M and 0.8% Y/Y inflation. We see downside risks. In theory, this outcome should be supportive for European bonds and a negative for the euro. However, given the downward pressure on global/US bond yields we are not that sure that a low inflation figure will spark a new sustained down-leg of EUR/USD at this stage, especially as quite some QE speculation should already be discounted. In the US, the jobless claims, the second reading of the Q2 GDP and the pending home sales will be published. Claims are expected more or less stable near 300K. Q2 GDP growth is expected at 3.9% Q/Q annualised (from 4.0%). For these data we don’t expected big surprises. The pending homes sales are a wildcard.

Aside from the data, we keep a close eye on the global context. Of late, we saw some ‘remarkable’ developments, e.g. the sharp decline in core bond yields, not only in Europe but also in the US. A further substantial decline of core bond yields at some point might weigh on USD/JPY. Temporary, it might also affect other dollar cross rates. In the current environment, a risk-off correction also shouldn’t be that negative for the (low-yielding) euro or positive for the dollar.

To conclude: the medium term economic and monetary fundamentals point to a weaker euro and a stronger dollar over time. However, we currently see ‘strange’ global market developments making us more cautious on the EUR/USD downtrend short-term, especially as the pair is in oversold territory. The downside of USD/JPY might also become more vulnerable short-term.

In a longer term perspective, the EUR/USD downtrend stays intact. Last week, EUR/USD dropped below the 1.3296 support, opening the way to the 1.3105 target (Sept 2013 low). 1.2755/1.2662 is key longer term. A more pronounced correction (EUR/USD rebound) is still an opportunity to add EUR/USD short exposure, but we are not in a hurry to do so at the current levels. The EUR/USD downtrend remains intact as long as the pair holds below the 1.3345 area.

Sterling trading still looking for a new driver

Yesterday, there were again no important eco data on the calendar in the UK. On Tuesday, we already indicated that sterling performed rather well and that the correction of sterling was losing momentum, even against the dollar. This pattern was confirmed yesterday. In technical trade EUR/GBP drifted below the 0.7950 mark and cable retested the 1.66 barrier. The EUR/GBP decline was reversed later, but this was due to a rebound of the euro at that time. So, the hypothesis of sterling bottoming out was not really overruled yet.

Today, the calendar in the UK contains the CBI distributive trades report. Most often, this report has less market impact than the ONS retail sales data. Even so, after some less inspiring UK data of late, we are keen to see whether some rebound is on the cards and whether it helps sterling to find a bottom after the recent correction.

In August, sterling fell prey to profit taking, as the UK data turned a bit mixed. Especially ongoing low wage growth helped BoE’s Carney to fend off calls for early rate action. At the same time, the BoE minutes showed that two members voted for a rate hike in August. EUR/GBP settled in a 0.7875/0.8035 consolidation range. The sell-off in cable was in first place due to dollar strength. EUR/GBP touched a correction top in the 0.8035 area mid-August, but global euro weakness prevented a further rise. We assume that this area is now a new strong resistance for the EUR/GBP cross rate. We reinstall a sell-on-upticks approach. The 2014 low (0.7874) is the first important support. We maintain our LT bearish view on the euro with EUR/GBP 0.7755 as a target.