EUR/USD sell-off taking a breather

On Monday, global (currency) markets had some kind of ‘calm before the storm’ experience. The sell-off on the Chinese equity markets had no impact on European equities. In technical trading, the euro rebounded after the post SNB sell-off. EUR/USD (temporary?) regained the 1.16 barrier, awaiting high profile event risk later this week. USD/JPY found a new short-term equilibrium in the lower half of the 117 area (off last week’s low), as global sentiment on risk remains constructive.

Overnight, the focus was on the Chinese data. Quarterly GDP growth slowed to 1.5% Q/Q but overall 2014 growth printed slightly higher than expected (7.4%). December retail sales and industrial production were also marginally better than expected. Asian markets react in a positive way. Chinese equities rebound moderately after yesterday’s sell-off. Japanese stocks are outperforming too, as the yen extends yesterday’s slide. USD/JPY regained the 118 handle. The BOJ holds a policy meeting today and tomorrow. No change in policy is expected. The IMF revised down the growth forecasts for world economy in 2015 from 3.8 % to 3.5%, but no impact on FX trading. The dollar is well bid across the board. Articles in the US press (WSJ) indicate that the Fed remains on track to raise its policy rate later this year. This might be a slightly supportive for the USD currency, too. EUR/USD dropped back below 1.16.

Today, the eco calendar is again only moderately interesting. In Europe with the German ZEW investor confidence and the US NAHB housing index. The latter is expected to improve slightly further from an already high level. (57 to 58). For the former, risks are a bit on the downside, but still at high levels. So, the data should slightly positive for the dollar and negative for the euro

Of course, markets will continue to look out for the event risk later this week with the outcome of the BOJ meeting tomorrow, the ECB decision on QE (Thursday) and the Greek elections (Sunday). Over the previous day’s the (mainly European) event risk had absolutely no negative impact on risk sentiment with European equities even outperforming after the recent decline of the euro. Even so, the debate on the structure/nature of QE continues.

In this respect, ECB’s Coeure said the question of risk pooling is one for governments not for the ECB. There are also again headlines this morning that Greeks are stepping up bank withdrawals but without any specifics. So, European markets might turn more cautious. Will it be a negative for the euro?

Strategy. Of late, we maintained a euro negative bias, even as the single currency already recorded substantial losses and is in oversold territory. The 1.1877/1.1640 support has been broken in a sustainable way after the SNB decision. This makes the picture for EUR/USD even more negative in a longer term perspective. We don’t row against the tide, but some consolidation or even a limited correction after the recent euro sell-off is possible. Investors with a short-term horizon might consider partial stop-profit protection on EUR/USD shorts. Uncertainty on Greece and on QE remains a negative for the euro, but part of this might already be discounted after the recent decline. For USD/JPY, we were cautious of late as we considered a fragile risk sentiment and low core bond yields a negative for USD/JPY and EUR/JPY. For now a test of the key support levels USD/JPY (115.57) and EUR/JPY (134.14) didn’t occur, as sentiment on risk improved at the end of last week and yesterday. Even so, the battle hasn’t been won. So we stay cautions on yen shorts for now.

EUR/GBP rises in line with overall euro performance

On Monday, sterling traders enjoyed calm trading. Cable hovered in a tight sideways range in the mid 1.51 area. At the same time, the euro (EUR/USD) rebounded, correcting part of Friday’s steep losses. EUR/GBP rebounded to the 0.7680 area after setting a correction low below 0.76 on Friday.

Overnight, sterling and the euro are ceding ground against a strong dollar. EUR/GBP filled covers in the 0.7690 area, but is off the rebound top at the moment of writing. Cable is losing the 1.51 big figure. There are again no important eco data in the UK today. Sterling trading will be at the mercy of global developments. Sterling found a bottom last week, especially against the euro. EUR/GBP fell to a multi-year low as the 0.7755/41 support was broken. Some consolidation after last week’s big EUR/GBP decline might continue short-term, but we keep a cautious EUR/GBP negative bias. The picture for cable remains fragile as the lows are again within reach.