Dollar rebound to slow?

On Friday, trading entered calmer waters after the sharp moves recorded earlier last week. The equity rally took a breather. The US currency initially copied this pattern. However, the downside in the dollar remained well protected. Later in the session, the dollar even found again a better bid, supported by a moderate rise in US yields at that time. Several Fed speakers kept the door open for the September rate hike which supported the dollar too. EUR/USD closed the week at 1.1156, from 1.1203. USD/JPY closed at 121.71 from 121.03.

Overnight, there is a lot of uncertainty on the level of equity support Chinese authorities will supply in the near future. Headlines on the issue are quite confusing. Most Asian equity markets turn into risk-off modus. The dollar is reversing most of its late Friday gains. EUR/USD rebounds to the 1.1250 area. USD/JPY dropped back to the low 121 area. In comments and interviews at Jackson Hole, Fed members indicated that there was no decision on a rate hike yet. Several governors kept the door open for a September rate hike. Most of them downplayed the impact of recent volatility and also suggested that the inflation target will be reached. As such, the Fed communication should be considered as USD positive. Of course, the dollar made already a nice rebound at the end of last week. This morning, uncertainty on China weighs as well.

Today, the EMU August CPI estimate will be published. The market expects a decline of the headline figure to 0.1% Y/Y from 0.2% Y/Y. For core inflation a slight setback to 0.9% Y/Y is expected after last month’s surprise uptick. We don’t have much reason to take a different view from the consensus. A downside surprise might be slightly negative ahead of this week’s ECB policy decision. In the US the Chicago PMI and the Dallas Fed Manufacturing activity will be published. The Chicago PMI is expected little changed at 54.8. After last month’s rebound, there are maybe slight downside risks. Usually, regional confidence data have only a limited impact on currency trading, but with the key September Fed meeting on the horizon, the reaction of the interest rate markets and of the dollar to US eco data might be a bit more pronounced. At the end of last week, we suggested that the risk-on rebound of equities and the comeback of the dollar might gradually shift into a lower gear. The dollar remained well bid on Friday, but the picture looks a bit less buoyant at the start of the new trading week. This week’s US data (ISM, ADP, payrolls) will be key for shaping the markets view on a September Fed rate hike. We think that the Fed is ready to raise rates in a the near future, unless the data are really negative or in case market volatility rises sharply. This scenario should keep the dollar reasonably well supported. In a day-to-day perspective, it looks that we are heading for a moderate risk-off session. This could trigger a pause, or even a limited correction on last week’s USD rebound.

In a longer term perspective, EUR/USD broke (temporary?) beyond the 1.1534 resistance (post-ECB QE top). This level was/is an important reference for our LT term EUR/USD short bias, which was questioned from a technical point of view. However, the EUR/USD rally was in the first place driven by global market factors (risk-off sentiment) rather than fundamental economic US and EMU news. Despite this technical warning, we maintained the view that the economic and monetary context hasn’t changed in such a way that it calls for a big change in favour of the euro and against the dollar. That said, the risk-off logic can still pop up and trigger pockets of USD weakness. For now, we see 1.1017/1.1714 as the new trading range. Within this range, a cautious sell-on-upticks approach is favoured going into the Fed September policy meeting.

Calm trading session ahead for sterling?

On Friday, sterling still failed to stage any meaningful comeback even as UK data remained constructive. GFK consumer confidence rose from 4 to 7. Second quarter GDP was confirmed at 0.7% Q/Q and 2.6% Y/Y. The detailed data from the demand side statistics were constructive too. Still there was hardly any positive reaction from sterling. After an initially EUR/USD-driven rebound, EUR/GBP hovered up and down in the 0.7355/15 range. Finally a late session downleg in EUR/USD pushed EUR/GBP lower too. The pair closed the session at 0.7268 (from 0.7300). Cable initially stayed under moderate downward pressure and even set a minor new correction low in the 1.5334/40 area, before succeeding a cautious rebound later in the session. The pair closed the day 1.5391, little changed from the 1.5403 close on Thursday.

During the weekend BoE’s Carney indicated that the recent events on China didn’t change the BoE’s assessment. He repeated that the BoE decision to raise rates will come into sharper relief around the turn of the year. Sterling regains some further ground this morning. Today, UK markets are closed. So sterling trading will probably be erratic and technical in nature. We were a bit disappointed by the performance of sterling last week. However, the price action late on Friday was slightly more constructive. We look out whether this is a harbinger of better sterling sentiment further down the road.