EUR/GBP revisits the 0.70 barrier

Dollar extends agains after Fed statement

After Wednesday’s Fed statement, USD investors were looking for signs that the US economy was in good enough shape for a Fed rate hike in September. However, the Q2 US GDP was too close to expectations to clarify this debate. The dollar remained well bid, but stronger evidence on the pace of the US recovery is needed to trigger more protracted USD gains. Even so, EUR/USD closed the session at 1.0932, from 1.0984. USD/JPY jumped to the mid 124 area intraday but closed the session off the lows at 124.14 (from 123.94).

Overnight, Asian/Chinese equities trade mixed. There were plenty of eco data in Japan. Labour market data and especially household spending was weaker than expected. Inflation was marginally higher than expected. The yen trades slightly stronger this morning. USD/JPY drifted (temporary?) back below the 124 mark. The move is probably in the first place a correction on recent USD strength, rather than a data driven rebound of the yen. The dollar also trades off yesterday’s highs against the euro. EUR/USD rebounded moderately to trade in the 1.0945 area at the moment of writing. No further progress in the commodity currencies for now. After tentative signs of bottoming out the end of last week and early this week, the short-term rebound in the NZD, AUD and the CAD stalled. The currencies hold close to the recent lows against the USD.

Today, the EMU calendar is moderately interesting with the EMU labour data and the EMU CPI estimate. The headline CPI is expected unchanged at 0.2% Y/Y (0.8% Y/Y expected for the core). We see slight downside risks to the consensus. If so, it might be a slightly negative for the euro. The ‘risk’ of a referendum in the Syria party looks off the road. The party will hold a Congress in September. So, Greece probably won’t return as a high profile event for (currency) trading, at least not in the very near future.In the US, the employment cost index, the Chicago PMI and the final Michigan consumer confidence will be published. We keep a close eye at the employment cost index. An upward surprise might be seen as supporting the case for a Fed rate hike. Over the previous days, the dollar reacted positively to the Fed policy statement and to US GDP, even as they were not outright USD positive. Some consolidation on the recent rally might be on the cards unless the US data are stronger than expected.

On the other hand, markets now clearly take into account the possibility of a September rate hike. This is giving the dollar decent downside protection.
Something like a big miss in the payrolls or elevated market volatility is probably needed to the trigger a meaningful setback in the dollar.

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 no break occurred. The global picture remains USD constructive (EUR/USD negative), but some consolidation after the recent EUR/USD decline is happening. 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.

EUR/GBP revisits the 0.70 barrier

Yesterday, sentiment on sterling remained constructive, even as there were no UK eco data. From the start of European trading, the UK currency started a gradual intraday uptrend against the euro and initially also against the dollar.
Cable trended higher from the 1.56 area to the 1.5635 area, even as the dollar was well bid across the board. EUR/GBP drifted lower in the 0.70 big figure EUR/GBP dropped temporary below the 0.70 barrier after the publication of the US GDP data. Later, the sterling/cable outperformance eased. EUR/GBP closed the session at 0.7008, from 0.7041. Cable was unchanged at 1.5602. Given the overall USD strength, the performance of Cable/sterling confirms the constructive sentiment on sterling.

Overnight, the UK GFK consumer confidence declined slightly more than expected from 7 to 4, but this is still a decent level. For now, there was no big reaction of sterling. Later today, there are no UK eco datareports. So, sterling trading will again be driven by the performance of the dollar and the euro. If the USD rebound takes a breather, it might be difficult for EUR/GBP to force a sustained break below 0.70 short-term.

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 another rebound goes a bit further to reinstall/add EUR/GBP shorts. The 0.7225/50 area is a first technically important resistance.