Sterling well bid going into the UK labour market report

Euro immune for escalating Greek debt crisis

On Tuesday, intraday trading in EUR/USD developed in an erratic fashion as the Greek debt drama continued. The link between the news headlines and the market movements, but also the links between markets, were often difficult to understand. EUR/USD rose early in the session, as sentiment on risk deteriorated, but declined back to the low 1.12 area as equities rebounded later on. Remarkably, this risk-on rebound of equities and of the dollar occurred as Greek PM Tsipras held a very aggressive speech against its creditors. Is the Greek default/Grexit more or less discounted by markets? USD/JPY was again an area of remarkable calm, holding near the 123.50 pivot.

This morning, Asian equities are mixed to negative with Japan and China underperforming even as US equities rebounded yesterday evening. Greece and the Fed are the key factors for global (currency) trading today. However, both themes are currently not really able to give a clear signal for trading in EUR/UISD or USD/JPY. EUR/USD stabilizes in the mid 1.12 area. USD/JPY remains locked in the 123.50 area. 

Will the Fed unlock the stalemate in USD trading?

Today, the final release of the EMU CPI will be published, but we don’t expect a revision. In the US the eco calendar is empty. So, the focus will stay on Greece and even more on the Fed. Regarding Greece, we have the impression that markets have more or less accepted the idea of a Greek default, maybe even a Grexit. The impact from the theme on global risk sentiment and the euro is apparently fading. We expect that to remain the case. The Fed communication might be more interesting for USD trading later today. The Fed will probably maintain a constructive view on the US economy. At the same time, we don’t expect any clear hints on the timing of a first rate hike. The Fed will probably hide behind the ‘datadependent’ rhetoric. The interest rate forecasts of the individual Fed governors will be interesting (see fixed income part of this report). If the dots are lowered again, it might be a (temporary) negative for the dollar.

Over the previous days, trading in EUR/USD and, to a lesser extent, in USD/JPY was paralysed by the Greek debt crisis. We don’t expect a big impact on EUR/USD trading today. So, the focus will be the FOMC meeting. The Fed’s assessment on the economy and the communication at the press conference will be balanced, but the Fed rate path expectations might be a negative for the dollar. There might also be remarks on the impact of the stronger dollar on economic activity, but after the recent stabilisation of the dollar, the impact of such remarks should be moderate. Return action to the recent highs in the EUR/USD 1.1380/85 area is possible.

In a longer term perspective, EUR/USD still trades in the consolidation range marked by 1.0819 and 1.1386/1.1467. A break above the upside band would be a warning signal for USD bulls. We maintain our cautious sell on up-ticks approach for return action lower in this range as we don’t see a real change in the global picture, but we are well aware of the risks (stop loss). In a longer term perspective, the 1.1534 February correction top remains our line in the sand to maintain a USD positive bias MT term. We assume that this level will hold, e.g. even in case of an agreement on Greece. However, stop-loss protection is warranted to defend a break, for whatever reason. 

Sterling well bid going into the UK labour market report

On Tuesday, sterling (cable) declined as the core UK CPI was slightly softer than expected. However, the setback of sterling was short-lived. Sterling staged a remarkable comeback later in the session. We didn’t see any high profile news to explain the move. Cable closed the session at 1.5648 (from 1.5601). EUR/GBP dropped below the 0.72 barrier and closed tat 0.7188 (from 0.7232).

The calendar in the UK is interesting with the labour market data and the Minutes from the June BoE meeting. A further improvement in labour market conditions is expected with especially a substantial rise in wages/earnings. If these expectations on higher wages are met (or exceeded), it might be a further positive for sterling. The BoE will probably maintain a constructive view on the economy. At the same time, they can stay in wait-and-see modus as inflation was still negative at the time of the June meeting. Potential dissenters already indicated that they were close to voting for a rate hike, but with the inflation still in negative territory the case for a rate hike is not that credible.

Until mid-May, sterling remained in good shape even as expectations for a BoE rate hike were pushed back to 2016. The UK elections were a sterling positive, too. A correction kicked in at the end of May. EUR/GBP set a rebound top at 0.7386. As EUR/GBP approached a first important resistance (0.7483) we reinstalled a cautious sell-on-upticks bias. Recent price action suggests that the downside of the range (0.7055 area) remains well protected too. For now this is a perfect range trading story. The day-to-day bias remains EUR/GBP negative.