KBC Market Research Desk
KBC Bank
Dollar on the defensive
On Monday, trading in EUR/USD, in USD/JPY and other USD cross rates was technical in nature. There were no eco data and US bond markets were closed in observance of Columbus Day. EUR/USD retested the recent highs, but at the end of the day, the pair was unchanged at 1.1258. USD/JPY ended the session marginally lower at 120.04 (from 120.27) as ( European) equities recorded moderate losses. The commodity rally also did run into resistance, but there was no straightforward impact on the USD.
Overnight, sentiment on risk turned cautious. Most Asian equity indices show modest losses with Japan underperforming. The Chinese September trade surplus was much bigger than expected, but the details were mixed. Exports declined less than expected, but imports showed a much wider than expected decline. Repercussions for global markets’ trading are difficult to draw. At this stage, some disappointment on Chinese demand translates into a slight risk-off sentiment. Commodities are falling prey to profit taking after the recent rally. This weighs on the Aussie dollar with AUD/USD drifting back south to the 0.73 area. The correction on Japanese equity markets sent USD/JPY back below the 120 level (at 118.85 currently). EUR/USD shows no clear directional trading pattern. The pair hovered between 1.1345/70 overnight.
Today, the calendar is modestly interesting. In Europe, we look out for the final German CPI data and the ZEW investors sentiment. The ZEW is expected to decline, both for the current conditions and the expectations component. We see downside risks compared to the consensus. This should be a slightly negative for the euro. However, over the previous days, the reaction function of the euro was far from straightforward. In the US, the NFIB small business confidence is expected to decline slightly from 95.9 to 95.5.e For this indicator, we don’t have strong views.
Global markets continue to struggle to assess the health of the global economy and its impact on monetary policy. In a short-term perspective, markets are focused on the impact of weaker than expected data on Fed rate hike path. In this context, the dollar is vulnerable short-term even as the ECB might ease policy further if economic conditions deteriorate further. However, potential ECB action is probably some way off. So, for now the short-term context is slightly negative for the dollar. A test of the 1.1460 resistance may occur.
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 year high (1.1719).
EUR/GBP holding near the recent highs
On Monday, sterling was in better shape compared to the end of last week. As was the case for the euro and the dollar, there was also no high profile news to guide sterling trading. Cable this time outperformed EUR/USD. EUR/GBP declined back to the 0.74 area. The pair closed the session at 0.7400 (from 0.7416). Cable came close to a first resistance at 1.5383 (last week top), but finally closed the session at 1.5348 (from 1.5322 on Friday).
Overnight, BRC retail sales were reported stronger than expected. However, it didn’t help sterling. On the contrary, sterling is losing ground against the euro and the dollar. Today, the sterling session may be interesting with the UK price data. CPI inflation is expected unchanged at 0.0% Y/Y. A below consensus report might be negative for sterling, as it will give the BoE more time to assess the need for a rate hike. BOE MCCafferty and Vlieghe will testify before UK lawmakers. BoE Haldane will speak later today. McCafferty voted for a rate hike. Haldane stands on the dovish side. Yesterday, it looked temporary that sentiment on sterling could improve, but it isn’t confirmed this morning. So, for now EUR/GBP will probably hold near the recent highs, especially if EUR/USD remains will bid, too.
From a technical point of view, EUR/GBP still trades in the upper part of the sideways range capped by 0.7483. Previous highs at EUR/GBP 0.7423/43 are under test but no sustained break occurred yet. Trading north of 0.7483 would deteriorate the short-term picture of sterling. This 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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