EUR/GBP correction continues

USD longs faces another squeeze

On Friday the dollar took a strong start. USD/JPY remained will bid in Asia. The USD rebound against the euro halted temporary after a ‘better’ EMU Q3 GDP report. US retail sales were strong. EUR/USD dropped to the 1.24 area. The Michigan consumer confidence was also strong, but didn’t help the dollar to any further gains. On the contrary, the market apparently found itself a bit too much USD long and a powerful squeeze started. EUR/USD jumped to the mid 1.25 area. USD/JPY dropped to the low 116 area. The dollar failed again to profit from strong US data.

Overnight, the Japan Q3 GDP came out awfully weak as the economy contracted by 1.6% in Q3 annualised, after a contraction of 7.3% in the second quarter, due to a sales tax hike. Last week, the Nikkei rallied and the yen declined as markets speculated that PM Abe would delay a second sales tax hike and call snap elections in December. This scenario has become even more probable after today’s poor GDP. However, markets don’t take it from the positive side anymore. Japanese equities decline around 3% at the moment of writing. USD/JPY filled offers in the 117 area this morning, but is also captured by the risk-off sentiment. USD/JPY is changing hand in the 115.60 area. The USD/JPY decline also put the dollar further under pressure against the euro. EUR/USD touched a short-term recovery top in the 1.2575, but is now off the highs.

Later today there are few data in the EMU, but several ECB members will speak, including ECB’s Praet. President Draghi will testify before a commission of the European Parliament. One can only expected him to stay dovish, but will it have much impact on the euro? In the US, the Empire manufacturing survey and the October production data will be published. We expect reasonably good data, but the same question here: will they have any positive impact on the dollar? It looks that sentiment will be risk-off today. Poor Japanese data and ongoing tensions in Russia/Ukraine weigh on sentiment. This risk-off sentiment is in theory supportive from the funding currency of carry trades (the euro). We don’t expect a big sustained EUR/USD rebound. That said, the market is obviously not yet ripe for another up-leg of the dollar against the euro, even not in case of good US eco data. We don’t row against the long-term USD uptrend, but overbought conditions make the US currency fragile short-term.

Broader picture. We have a bullish LT view on the dollar. The difference in policy stance between the US and Europe suggests more dollar gains against the euro further down the road. Draghi reinforced this view at the ECB press conference, but it was not enough to trigger a sustained EUR/USD downleg. From a technical point of view, the break below 1.25 opens the way to the 1.2043/1.1877 key support area (July 2012 low/Crisis low June 2010).We think that those levels are feasible. Strong USD data might help to go that way. However, of late US rates and the dollar reacted very reticent to good US data. This suggests that there was/is still some time needed to digest the recent decline of EUR/USD. Look to sell into any more pronounced up-ticks.

USD/JPY spiked sharply higher after the BoJ policy decision. The pair took out several key resistances and reached the highest level in 7-years. Technically there is no big hurdle anymore till the psychological 120 mark and the major LT 2007 top (124.11). These levels are far away, but the break suggests that the move in USD/JPY might still have some way to go, both due to yen weakness and further USD strength. We have a LT USD/JPY positive bias. On Friday we advocated that partial stop-profit protection of USD/JPY longs could be considered as we feared some kind of buy the rumour sell the fact reaction after the Japanese Q3 GDP. This morning, it looks that such a move might develop short-term.

EUR/GBP correction continues

On Friday, the sterling decline initially slowed. However, the late session USD long squeeze also triggered EUR/GBP buying, pushing the pair to the 0.80 area. Cable rebounde too, but the move was much less pronounced.

During the weekend, a published speech of BoE’s Haldane was also very soft. He indicated that the he would keep a close eye on any signs of a decline in inflation expectations in the UK. For now there are no additional losses for sterling. Later today, there are no important eco data on the agenda in the UK.

Of late, the 0.7755/0.78 area proved to be tough support for EUR/GBP. Sterling negative sentiment was reinforced by a softer than expected BoE inflation report. We continue to look out for signs of the EUR/GBP rebound losing momentum. For now, such a signal is not yet available. We don’t row against the tide (yet). Even so, EUR/GBP returning to the 0.80 area might be a first level to re-evaluate recent developments.