EUR/GBP struggles to regain 0.8000 mark

Euro profits from better eco data, USD doesn’t

Yesterday, the news flow was far from spectacular. Japanese PM Abe announcing snap elections and a delay in the sales tax didn’t spark much of an immediate reaction from USD/JPY anymore. Even so, the pair remained close to the recent highs. The euro was more sensitive to positive economic news than the dollar. EUR/USD regained the 1.25 mark after a better than expected ZEW confidence. The dollar again didn’t profit from a marginally higher than expected PPI and a strong NAHB indicator.

Overnight, USD/JPY is drifting further north of 117.00. The BOJ as expected kept its policy unchanged. The Abe announcement yesterday was no surprise anymore, but the hope for a supportive monetary and fiscal policy is keeping the yen in the defensive for now. Asian equities are mixed this morning despite the Dow and the S&P setting new all-time highs. However, the risk-on trade still leaves no traces on the (US) interest rate markets. So, the dollar still doesn’t get any additional interest rate support. Any US gains mostly come for weakness in other currencies like the yen. EUR/USD remains blocked in the recent ranges with no clear directional bias. The pair is changing hands in the 1.2525 area at the moment of writing.

Today, there are again few eco data in Europe or in the US. The US housing starts and building permits are the exception to the rule. However, both series are notoriously volatile. We expect any reaction of the dollar to these data to be only of intraday significance, at best. After the close of the European markets, the Minutes of the October FOMC meeting will be published. The internal debate within the FOMC is always worth looking at. We considered the latest FOMC statement as moderately hawkish as the Fed was rather optimistic on the economy and not that much worried on the too low inflation. The statement/assessment should also be backed by the non-extreme members within the committee. In our view, the market recently reacted quite soft given the fed’s guidance/assessment. However, it is far from sure that this will change after the reading of the Fed minutes. For now, we see no strong enough case for EUR/USD to break out of the 1.2350/1.2575 trading band.

Broader picture. The different 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 opened 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 news from the US. 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 and is reaching 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 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. This week’s price action suggests that the downside in this cross rate is rather well protected as long as sentiment on risk remains constructive.

EUR/GBP struggles to regain 0.8000 mark

Yesterday, the focus for sterling traders was on the UK CPI data. In the wake of the BoE inflation report, several BoE members including Carney spoke soft on inflation. Sterling reacted accordingly and was sold. UK inflation was reported close to expectations with the headline (1.3% Y/Y) slightly higher and the core (1.5%) slightly lower than expected. EUR/GBP hesitated after the publication of the data. The better than expected ZEW finally pushed EUR/GBP again slightly north of 0.8000. This was of course a euro move, but the CPI was not enough to mark a clear halt to the GBP correction. Cable was also little affected and settled in calm trading in the mid-1.56. big figure.

Today, there are no eco data on the agenda in the UK. The BoE view on inflation is already well documented after the BOE inflation report. We look whether the soft inflation assessment changed the voting pattern of the two BoE dissenters (McCafferty and Weale voted for a rate hike in October). However, we don’t think they did. In theory, this might be a slightly supportive for sterling, but the momentum of the UK currency was not strong of late. We continue to look out for a topping out process in EUR/GBP.