KBC Market Research Desk
KBC Bank
On Monday, EUR/USD and USD/JPY searched a new trading theme in the wake of Friday’s poor US payrolls. However, there was no clear story to guide trading. The dollar remained well bid as risk sentiment remains constructive. The US Non‐manufacturing ISM was slightly below consensus, but didn’t hurt the positive intraday momentum of the US currency. EUR/USD closed the session at 1.1188 from 1.1216 on Friday. USD/JPY ended the session at 120.46 (from 119.91).
Overnight, Asian equities show moderate gains with Japan outperforming.
However, the gains are much smaller than those in the US and in Europe yesterday. USD/JPY is holding an extremely tight range in the mid 120 area.
EUR/USD trades in the 1.1175/80 area, near the post‐payroll lows. The Reserve Bank of Australia left its policy rate unchanged at 2.0%, as expected and its statement was neutral. The RBA expects the economy to operate with a degree of spare capacity for some time. So, monetary policy needs to be accommodative. The Bank sees the AUD adjusting to the significant declines in the key commodity prices. The neutral tone of the statement suggests that no rate cut is imminent. This helps the AUD to rebound above the 0.71 mark.
Today, the calendar in Europe is almost empty. In the US, the trade balance will be published. Of late, the reaction of the dollar to the US trade data was very modes, but now it may become more important. A substantial rise in the deficit is expected. This suggests that net exports will be a drag on Q3 growth, with repercussion on the Fed’s rate debate and on the USD strength. We have no strong arguments to take distance from the consensus. Even so, the report might generate some USD negative headlines. Aside from the US trade data, currency traders will look for guidance to the global equity sentiment. On Friday evening and yesterday, the dollar profited from a positive equity sentiment. This morning, the price action in Asia suggests that the global equity rally might shift into a lower gear. If so, it might also slow the rally of the dollar. The 1.1105/1.1087 support area is still some way off, but we assume that further USD gains might become more difficult in the absence of additional USD positive news.
In a long term perspective, EUR/USD and USD/JPY might see more range trading. A Fed rate hike will be delayed, but such a scenario also raises the chances for more ECB or BOJ easing. In this context, both EUR/USD and USD/JPY might still hold the recent ranges.
From technical point of view, the global picture for the dollar (EUR/USD) hasn’t changed. The dollar rebound ran into resistance just north of the EUR/USD 1.1087 support. but for now EUR/USD is holding the established sideways consolidation pattern. 1.1087/1.1017 is a solid bottom. 1.1460 is a first interim resistance. 1.1714 is the line in the sand. If the policy divergence between the Fed and the ECB would become still less obvious, EUR/USD may return toward the topside of this range.
Sterling holding tight ranges
On Monday, trading in sterling took a slow start for the new week. EUR/GBP hovered sideways in the high 0.73 area going in to the publication of the UK services PMI. Confidence in the UK services sector was much weaker than expected. The headline index dropped from 55.6 to 55.3. A rebound to 56.00 was expected. It weighed on sterling, but the sterling losses remained moderate, given the ‘big miss’ of the report. Later in the session, dollar strength again prevailed as a factor for sterling trading. Cable dropped off the intraday top in the 1.5240/45 area to end the session at 1.5146 (1.5185 on Friday). The decline of EUR/USD pushed also EUR/GBP below the 0.74 barrier. The pair closed the session at 0.7387 hardly changed from the 0.7382 close on Friday. So, the damage from the poor UK PMI was limited.
Today, UK eco calendar is nearly empty. So, sterling trading will be at the mercy of global market sentiment. We assume that the post‐NFP equity rally runs gradually into resistance. That may slow the rebound of the dollar and make the downside in EUR/GBP more difficult. In a‐day‐to‐day perspective, it might be difficult for EUR/GBP to stay below the 0.74 barrier. Event risk might still come from the conference of the conservative party. Markets will also look forward to the BoE policy assessment to be published on Thursday. Will the BOE soften its tone after recent developments in the UK and worldwide? From a technical point of view, EUR/GBP is still trading in the upper part of the trading range which is marked by the 0.7423/0.7483 boundaries. The 0.7423 was extensively tested, but no sustain break occurred. Trading north of 0.7483 would deteriorate the sterling short‐term technical picture, which is not our preferred scenario. Even so, partial stop‐loss protection on EUR/GBP shorts can still be considered.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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