Dollar slightly lower on risk-off sentiment

On Friday, the dollar initially regained some ground after Thursday’s setback. Ongoing downward pressure in commodities was maybe slightly positive for the dollar. The EMU PMI declined slightly and triggered a setback in EUR/USD. Later in US trading, sentiment on risk deteriorated and this weighed finally on the dollar. EUR/USD reversed the early losses and closed the session at 1.0984 unchanged from the previous day. USD/JPY declined to 123.81 from 123.93.

Overnight, most Asian equity indices join the risk‐off correction from the US on Friday. China underperforms with losses of up to 3.0%. Industrial profits in China dropped 0.3% Y/Y in June. The figure adds to the uncertainty on Chinese growth. The risk‐off trade is causing some further moderate losses of the dollar. USD/JPY is changing hands in the 123.50 area. BOJ’s Nakaso said the Bank should watch with attention how China’s slowdown affects other Asian economies and Japanese exports. EUR/USD tries to regain the 1.10 barrier. Commodities stay close to the recent lows, but there are tentative signs that the pace of the decline is slowing. AUD/USD is stabilising in the upper half of the 0.72 big figure.

Today, the EMU Money supply data and the German IFO business climate index will be published. In the money supply report, we look out for further signs of improvement in lending. Even so, the reaction of the currency market to the report is mostly limited. For the IFO, a slight setback from 107.4 to 107.2 is expected. We see risks for a slight positive surprise. On Friday, the weaker than expected PMI weighed temporary on the euro. It will be interesting to see whether there is any (positive) reaction to the IFO report. Whatever the outcome of the IFO, global sentiment on risk and the US data will probably be more important as a driver for EUR/USD trading. In the US, the durable goods orders will be published. The series is notoriously volatile. We see upward risks to the consensus. This could be slightly positive for the dollar in the run‐up to the FOMC policy announcement on Wednesday. However, we don’t expect the report to be a game‐changer for USD trading. Sentiment on risk remains cautious this morning in Asia. Question is to what extent European equities will continue the risk‐off trade? We are not convinced that the risk‐off trade should accelerate, but the jury is still out. So, the dollar might start the week slightly in the defensive, but we expect no major trend move ahead of the FOMC decision on Wednesday evening. EUR/USD might hold close to the 1.10 pivot. The shortterm picture for USD/JPY looks a bit more precarious.

In a longer term perspective, EUR/USD still trades in the 1.08/1.1467 consolidation range. The bottom of this range was tested last week, but a sustained break didn’t occur. The global picture remains USD constructive (EUR/USD negative), but some consolidation after the recent EUR/USD decline is occurring. We maintain a sell on upticks approach for return action lower in this range. EUR/USD 1.1224/78 is a first point of reference. The 1.1534 February correction top remains our line in the sand to maintain a USD positive bias MT term. On the downside, the 1.0819/09 area (27 May low/correction low) is the first high profile support. A sustained break below that level would open the door for a retest of the 1.0521/1.0458 area.

GBP trading shows no clear trend

On Friday, trading in cable and EUR/GBP was mostly technically in nature.
Cable initially declined a bit further and dropped temporary to the 1.5470 area. However, this move was limited given the decline in EUR/USD (and the relative strength of the dollar overall). BBA loans for home purchases were strong, but we didn’t see any direct impact on sterling trading. Even so, cable settled in a tight range close to but mostly slightly below 1.55.

The pair even reversed the earlier losses later in the session as the dollar came under pressure. Cable closed the session at 1.5508, little changed from the 1.5514 close on Thursday. Similar picture for EUR/GBP. The pair ended the day at 0.7081 (versus 0.7080). Late on Friday, BoE’s chief economist Haldane said he didn’t see the need to move quickly to raise rates as the UK economy is still recovering from the financial crisis and risks on the global economy remain. His comments are out of line with recent mainstream communication from the BoE, which was more hawkish. Today, CBI industrial total orders and the quarterly business optimism survey will be published. A limited setback is expected. Of late, CBI orders already showed a slight loss of momentum. Is there room for an upward surprise now?

We had a sell‐on‐upticks approach for EUR/GBP to drift lower in the 0.7483/0.7014 range. Of late, we turned more cautious on sterling as EUR/GBP neared this range bottom. We kept the working hypothesis that high profile news is needed to push EUR/GBP sustainably below 0.70. The ongoing decline of EUR/USD pushed EUR/GBP (temporary?) below the 0.70 mark. We stay reluctant to jump on the sterling rally at the current levels and hope that the rebound goes a bit further to reinstall/add EUR/GBP shorts. The 0.7225/50 area is a first technically important resistance in this cross rate.