UK wage data key for sterling trading

Will the Fed give a strong enough signal to support the USD?

On Tuesday, the swings in the oil price were still the key feature for currency trading. The ongoing oil price decline brought markets in a ‘crisis-like mind-set’. The core dollar cross rates were captured by the ‘usual’ risk-off reaction. The yen is still the preferred safe haven currency. Unwinding of carry trades also supports the euro even as the Russian crisis has more negative effects on the European economy than on the US one. A technical short squeeze triggered a temporary reversal across markets late in Europe. However, the impact on the major currency cross rates was limited. EUR/USD returned to the 1.25 area. USD/JPY tried to regain the 117 big figure. However, there was no follow-through price action later in the US.

Overnight, Asian equities trade mixed. Oil is still within reach of the recent lows. This is keeping investors in a wait-and-see mode. Japanese foreign trade data disappointed with both exports and imports coming out below expectations. So, monetary stimulus is still helpful for the Japanese economy. Even so, the reaction of the yen was close to non-existent. USD/JPY hovers near the 117 area. EUR/USD is changing hands in the 1.2480 area. The focus remains on the next developments in the oil/Russia crisis and on the Fed policy decision.

Later today, eco calendar in Europe contains the final CPI for December. A confirmation of the 0.3% Y/Y is expected, but there is a slight risk for a downward revision. Markets also keep a close eye on the first round of the presidential elections in Greece. It is expected that 200 majority won’t be reached. Markets will try to draw some conclusions for the final third round.
Uncertainty on the outcome of the process is in theory a negative for the euro, but until now had only a limited impact on the single currency. We look also out whether a potential widening in Greek spreads might have additional fall out on other intra-EMU government bond spreads.

The other major theme, the Russia/oil crisis apparently reached some kind of a ‘rest point/temporary breather. However, it is highly unlikely that more fall-out will occur. Of course, the focus today will be on the US. The US November CPI is expected at 1.4% Y/Y for the headline and 1.8% Y/Y for the core. We don’t see strong reason to take a different view from the consensus. In case of a deviation from consensus, the report might trigger additional volatility in the run-up to the Fed policy decision.

For an in-depth preview of the Fed policy decision see the rates part of this report. From a currency point of view we look out whether the “considerable time” quote will be removed, but we also keep a close eye on the ‘dots’. When the dots (which are much higher than current market expectations) are maintained, it could be a positive for the dollar. If they lower the expected rate path (e.g. end of year point from 1.375% to 1.25 or lower) currency markets can see this as the Fed backtracking on its intentions to start policy normalisation. The latter would be negative for the dollar. We also look out for indications on the Fed will react in case of ongoing volatility. Is it a reason to slow the normalisation process?

Strategy. Over the previous days, the decline of the oil price and the risk-off sentiment capped the topside of the dollar. Even in this context, we maintained the view that the 1.25/1.26 area should offer strong resistance for the euro. A ‘Russia/emerging market’ crisis should be negative for the euro in a longer term perspective, even as the reaction function of EUR/USD is highly indecisive. We assume that the Fed will continue its preparations for a gradual normalisation. However, in the current environment, it is not sure that the signal will be strong enough to trigger a new dollar rally. So, we don’t preposition going into the Fed meeting, but we maintain our long-term EUR/USD negative bias. The risk-off sentiment is putting yen cross rates like USD/JPY and EUR/JPY under pressure. USD/JPY is drifting bellow last week’s low (117.44), deteriorating the technical picture. A similar picture is developing in EUR/JPY. Protection on all yen shorts remains warranted.

UK wage data key for sterling trading

On Tuesday, UK headline inflation declined from 1.3% Y/Y to 1.0% Y/Y. Sterling spiked lower upon the publication. Cable filled bids in the 1.5615 area.
EUR/GBP briefly jumped north of the 0.80 barrier. However, the sterling sell-off was almost immediately blocked by surprisingly ‘hawkish’ comments from BoE’s Carney as He said that the policy stance was unchanged. He also said that the BOE will look through the direct impact of oil on UK inflation and that the fall in oil prices was unambiguously positive for the UK. Sterling immediately reversed the post CPI losses. Cable even regained the 1.57 are. The dollar remained under pressure, too. EUR/GBP returned the 0.7950 area. The late session short-squeeze on other markets had only a limited impact on sterling trading.

This morning, the UK labour market data will be published. The labour market was in quite good shape of late. Markets will especially look out for the wage growth data. Last month, wages showed some tentative signs of rising and a further rise is expected for October. If so, it should support sterling, especially as markets are positioned for the BoE to hike rates later rather than sooner. We maintain a sell-on upticks approach for EUR/GBP.