Sterling little changed despite soft BoE comments

Will USD receive support from Fed-statement?

On Tuesday, currency trading developed in calm summer holiday conditions.
The yen rebounded in Asia as markets questioned Japanese authorities' readiness to add aggressive stimulus. However, the move petered out soon.
USD/JPY settled in the lower half of the 104 big figure. The dollar gained slightly ground after the publication of the US mid‐morning eco figures. EUR/USD closed at 1.0986 (from 1.0995). USD./JPY finished the day at 104.66 (from 105.81).

This morning, Asian equities show again a diffuse picture. Most regional indices trade mixed, even as US equity futures show decent gains after the results of Apple published after‐closure. Chinese equities show losses of more than 2%.
Industrial profits (+5.1% Y/Y) were ok, but equities decline on a report that wealth managers might face stricter rules to invest in equities. Japanese markets gain more than 1% in volatile trading. USD/JPY jumped north of 106 on speculation (report) that Japanese PM Abe would announce a fiscal stimulus package. USD/JPY jumps up and down in the 105 big figure as Abe is now quoted that the stimulus will be more than JPY 28 trillion. However, the details of the plan and its financing are not available yet. EUR/USD is again little affected by the global market developments. The pair holds very close to 1.10.

Today, the US durable orders and pending home sales will be released. Durable orders are again expected soft. However, the impact of the report will be very limited as investors await the FOMC statement. At the previous meeting, a Fed rate hike was put on hold ‘sine die' after disappointing payrolls and as the Fed was afraid of Brexit uncertainty and market volatility. Will the Fed will amend its assessment after better US eco data? The uncertainty on Brexit isn't over yet, but the constructive market reaction caused a de facto loosening of monetary conditions. We don't expect the Fed to make a U‐turn preparing markets for a rate hike in the near future. However, markets are currently positioned for a very soft Fed. If the Fed elaborates on the recent positive developments, US bond yields and the dollar might go moderately higher. So, we keep a positive intraday bias on the dollar going into the Fed meeting. This applies in the first place to USD/EUR, but we expect the key support at EUR/USD 1.0913 to hold. USD/JPY traders will continue to look out to what extent the fiscal stimulus will be matched a further easing of the BOJ.

Of late, the global risk‐on and decent US eco data (payrolls, retail sales) had only a limited impact on EUR/USD. The pair traded with a slightly negative bias, but held within the 1.1189/1.0913 post‐Brexit range. For now, there is no trigger to break this pattern. In case of ongoing good US data, the Fed might come again in the picture. After Brexit, we assumed that EUR/USD entered a sell‐on‐upticks market. We hold on to that view. The post‐Brexit intraday top (1.1189) is a first resistance. First support comes in at 1.0913 (June 24 low).
USD/JPY was well bid recently on the hope for more fiscal stimulus and ongoing easy monetary conditions in Japan. The pair broke the 106.84 resistance on speculation of "Helicopter Money". The move was aborted as BOJ Kuroda dismissed the idea. The debate is ongoing (also this morning). The prospect of more stimulus is yen negative. However, the 107.49 correction top is a strong resistance that may hold unless the BOJ eases really aggressive (on Friday).

 

Sterling little changed despite soft BoE comments

On Tuesday, sterling was initially under pressure as BoE's hawk Weale left its reluctance on further monetary easing based on soft PMI's. EUR/GBP rose to the 0.8425 area early in European dealings. Cable filled bids in the 1.3060 area.
However, sterling recouped a big part of the initial losses later in the session.
Markets are apparently not yet convinced on the magnitude and the nature of potential BoE easing at next week's meeting. EUR/GBP closed the session unchanged at 0.8367. Cable finished the day at 1.3130 (from 1.3140). Today, the first estimate of the UK Q2 GDP and the CBI distributive trades will be published. UK Q2 growth is expected at a decent 0.5% Q/Q and 2.1% Y/Y.
Consumer spending is expected to have been strong, but only the details of the supply side will be published. A good figure might be mildly positive for sterling but we expect any reaction to be modest as this report applies to the pre‐Brexit era. In this respect, the July CBI reported sales might be more interesting even as the market reaction to this release is mostly limited. A modest decline is expected. A negative surprise is negative for sterling, but sterling held up reasonably well of late. Currency markets don't feel inclined to trigger a clear directional move ahead of next week's BoE meeting.
Longer term picture. Over the previous two weeks, sterling initially held strong as the BoE left its policy unchanged, even as the BoE indicated that stimulus was likely at the August meeting. This prospect should cap further sterling gains. We consider the post BoE highs of sterling against the euro (EUR/GBP 0.8250) and against the dollar (Cable 1.3480 area) as strong resistances. We prefer to sell sterling on upticks.

 

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