Will CPI data break the referendum stalemate?

The countdown continues

Yesterday, the euro reversed part of Friday’s tentative rebound against the dollar. The EUR/USD down-move in the morning was technical in nature. The US eco data were mixed and couldn’t help the dollar build out initial gains.
EUR/USD finally settled in the mid 1.29 area, awaiting the key event to come later this week. USD/JPY hovered tightly in the lower half of the 107 big figure.

Overnight, Asian markets remain in wait-and see modus. Most Asian equity indices show limited losses. EUR/USD is little changed in the mid 1.29 area.
USD/JPY tries to move away from the 107 level. BOJ’s Kuroda repeated that the BOJ has still tools available to ease monetary policy, but that it has no plans to ease now. He added that the BOJ is making steady progress in meeting the inflation objective and repeated that the weaker yen is not hurting the economy. So, this is still a ‘Nihil obstat’ for some further yen weakening.

Today, the calendar is only modestly interesting. In Germany, the consensus expects the ZEW investor confidence to decline further, but we see a risk for a better than expected outcome. If so, it might be slightly positive for the euro, but the ZEW is seldom a trend changer. In the US, the PPI is expected little changed and thus unlikely to change the market assessment ahead of the Fed policy decision.
Last week, the market positioned for the Fed taking a small step towards policy normalisation. This caused a rise in core/US bond yields. This move has run its course. So, for now the dollar doesn’t get additional interest rate support. This suggests more erratic-like sideways trading in USD/JPY and EUR/USD in the run-up to the Fed policy announcement. After the Fed decision, attention will shift to the TLTRO liquidity operation and the Scottish referendum. Uncertainty on those issues will probably cap the topside in EUR/USD, unless the Fed is extremely dovish, which we don’t expect. Yesterday’s price action confirmed that the 1.30 barrier won’t be that easily regained.

From a technical point of view, USD/JPY confirmed the clearance of the key 105.44 resistance, opening the door for a new up-leg. The negative impact of the weak US payrolls was limited and short-lived. Better US data and anticipation on the Fed preparing markets for a less expansive policy can still push the pair higher.

At the same time, the yen remains in the defensive as markets see a decent chance of more BOJ easing down the road. We maintain a positive bias on USD/JPY. 110.66 is the next important resistance.

The technical picture of EUR/USD deteriorated substantially after the break below the key 1.3105 level (Sept 2013 low). This level is now the new resistance that will be difficult to regain. The negative deposit rate is a structural negative for the euro. In a longer term perspective, the EUR/USD downtrend is confirmed. 1.2755/1.2662 is the next key support. A more pronounced correction (EUR/USD rebound), is an opportunity to add to EUR/USD short exposure. The euro is currently working off oversold conditions.

Will CPI data break the referendum stalemate?

Yesterday, there was again no clear directional move in sterling trading. The UK data have only limited impact on trading these days and there was also little in the way of hard political news on the Scottish referendum. It will be a neck-and-neck race and this uncertainty will only be solved when the final result will be on the screens late on Thursday. EUR/GBP declined temporary to the mid 0.79 area. This was in the first place a euro move, which was undone later in the session. Cable drifted cautiously lower in the 1.62 big figure.

Later today, the UK price data will be published. Normally this is a potential driver for sterling trading as this is key information for the BOE’s policy assessment. The consensus expects a decline from 1.6% to 1.5%, well below the 2% inflation target. We see even downside risks to the consensus. In ‘normal times’ such a scenario should be negative for sterling. However, today the reaction will also be disturbed as investors are focusing on the referendum when managing GBP positions. That said, we still see a chance for sterling to lose ground in case of soft inflation figure.

Uncertainty on the referendum after the recent opinion polls made us change our ST bias on sterling last week. There is a substantial risk that this issue will keep sterling investors side-lined until it is out of the way. We removed our sell-on-upticks bias for EUR/GBP and installed stop loss protection on GBP-longs (both against USD and EUR). We avoid sterling long exposure short.