Dollar on the defensive

On Friday, the dollar faced some headwinds. The greenback lost ground against the EM and commodity-related currencies as commodities rebounded further. However, the US currency ceded also ground against the euro. The Minutes of the September Fed meeting were somewhat dovish and this probably triggered further repositioning out of the US currency. EUR/USD closed the session at 1.1358 area (up from 1.1276 on Thursday). USD/JPY profited hardly from the risk-on trade. The pair holds in the lower half of the 120 big figure and closed the session at 120.27 (from 119.93).

During the weekend, several Fed governors indicated that they still support the scenario of a Fed lift-off this year (cf fixed income part of this report). However, the interest rate markets and the dollar continue to question this scenario. EUR/USD is holding in the 1.1375 area this morning in Asia. Chinese equities start the week with strong gains, apparently supported by quotes from PBOC deputy governor YI Gang: “the stock market correction is ‘almost over’”. Other Asiazn equities trade narrowly mixed. On Friday, BOJ’s Kuroda admitted that inflation in Japan stays below the 2% target due to the decline in oil and commodity prices. However, he didn’t see any need for imminent further stimulus. Japanese markets are closed. USD/JPY trades little changed (120.20).

Today, the eco calendar is empty. US markets will be in low volume modus in observance of the ‘Columbus Day’ holiday. So, trading will be technical in nature. Currency traders will again have to look to equities and to a lesser extent to commodities, to find clues for USD trading. Regarding equities, the picture is a mixed. The strong gains in China are not mirrored in US equity futures. On Friday, the recent positive correlation between the dollar and equities also didn’t work. The equity rally was at least partially inspired by (perceived) ‘soft’ Fed minutes and this context doesn’t help the dollar.
Commodities including gold stay well bid this morning and this is slightly USD negative. Friday’s break above the 1.1319/1.1330 area improved the short-term EUR/USD picture. So, in technical trade, a return to the 1.1460 resistance is possible.

In a long term perspective, EUR/USD and USD/JPY might see more range trading. A Fed rate hike will probably 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 hold the recent ranges. If the policy divergence between the Fed and the ECB becomes less obvious, EUR/USD may return toward the topside of this range.

EUR/GBP nears 0.7483 key resistance

On Friday, UK eco data were poor. The August construction output unexpectedly dropped by 4.3% M/M to be down -1.3% Y/Y. At the same time, the UK August trade deficit was also reported much wider than expected (after a very poor July figure which was also revised higher). The poor UK eco data probably added to the sterling negative sentiment, but at the time of the publication the charts didn’t show that much of a reaction. Basically, cable traded sideways to slightly lower while at the same time EUR/USD recorded strong gains. This combination pushed EUR/GBP back above the 0.74 barrier. EUR/GBP closed the session at 0.7416 (from 0.7348 on Thursday). Cable ended the day little changed at 1.5322 (from 1.5348)

Today, there are no data on the agenda in the UK. Trading will probably be driven by the price action in the dollar cross rates. For now, the dollar is the defensive and this causes some euro strength by default. This is also visible in EUR/GBP. We don’t see a real fundamental reason for the euro to go higher on a sustainable basis. The threat of more ECB easing at some point should again come in play. However, short term the euro in general and EUR/GBP in particular face some upside momentum.

From a technical point of view, EUR/GBP still trades in the upper part of the sideways trading range capped by 0.7483. Previous highs at EUR/GBP 0.7423/43 are still under test but no sustained break occurred yet. Trading north of 0.7483 would deteriorate the short-term technical picture of sterling. This is not our preferred scenario. Even so, partial stop-loss protection on EUR/GBP shorts can still be considered.

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