Brexit (rather than data) remains key for sterling

USD losing more interest rate support

Yesterday, USD selling pressure intensified throughout the day. Different curve moves in Europe and the US were to blame. The EMU yield curve bear flattened with higher ST yields. The US curve later bull steepened, with lower ST yields reducing interest rate support for the dollar. The US eco data were not to blame (mixed/close to expectations). Most of the curve moves and of the USD decline took place before the Fed Minute, but the move continued after the publication as several members were worried about the ongoing low level of inflation. EUR/USD closed at 1.1822 (from 1.1738). USD/JPY decline quite sharply closed the session at 111.22 (from 112.45).

Overnight, Asian markets are trading mixed to lower. Japanese markets are closed. Chinese markets underperform (fear from more credit regulation?). USD weakness propels the likes of the Korean won. USD/KRW dropped well below 1100, the strongest level for the won in two and a half years. EUR/USD holds in the 1.1830 area. Speculation on a new Grand coalition in Germany might be an additional euro support.

Today, US markets are closed in observance of the Thanksgiving holiday. The focus will be on the EMU data and on the German coalition talks. In EMU, the November PMI business sentiment is expected unchanged at 56, a level suggesting solid growth.. An outcome in line with expectations would suggest Q4 growth in line with Q3's 0.6% Q/Q, We don't expect the PMI's to change to broader picture on the EMU economy or on monetary policy. The formation of a new coalition in Germany is a wildcard. Will the SPD return the table, raising the prospect for a Grand coalition? If so, it might be slightly positive for the euro. That said, the euro didn't lose much ground on the German political uncertainty, suggesting no big euro rise if uncertainty declines.

Yesterday, curve moves in the US were important for the decline of the dollar. This factor will be absent today, as US markets are closed. The news flow from Europe might be neutral to slightly supportive for the euro. Over the previous days, we kept the working hypothesis that the EUR/USD 1.1861/80 area would be difficult to break and that the high interest rate differential between the US and Europe would at least help to prevent further USD losses. The jury is still out, but this hypothesis is clearly under pressure.

From a technical point of view, EUR/USD set a post-ECB low two weeks ago and regained since intermediate resistance at 1.1690/1.1837. The 1.1880 MT correction top was left intact. A break above the latter would suggest a full retracement to the 1.2092 correction top. We don't preposition for such a scenario, but pressure is rising. On the downside, the 1.1554 reaction low remains the first important reference, but it is far away. We look for confirmation that the 1.1861/80 resistance will be able to do its job, before adding EUR/USD short exposure. Partial stop-loss to defend a break higher might be considered.

The USD/JPY momentum was positive in October, but deteriorated this month. Last week's drop below the 112.96 support reinforces the downside pressure. Yesterday, USD/JPY dropped below the 111.65 neckline. IF confirmed, it would make the picture outright USD negative.

Brexit (rather than data) remains key for sterling

The UK Chancellor of the exchequer proposed the UK Budget. The UK government wants to use some of the fiscal room to invest, to support public services and keep taxes low. However, Hammond didn't bring any prospect of a substantial fiscal stimulation. The OBR also reduced the growth forecasts for the coming years, but this was no surprise. Sterling gyrated modestly during the statement and in the end the impact was limited. Sterling was driven by the broader USD moves. EUR/GBP mostly hovered sideways in the upper half of the 0.88 big figure and closed the session at 0.8871. Cable profit from overall USD weakness and closed at 1.3325.

Today, the details of the UK Q3 GDP and the CBI retail data will be published. The composition of the UK Q3 growth is interesting, but a bit old news. The CBI sales are expected to rebound after a sharp setback last month. (3 from -36). We expect it to be only of second tier significance. Markets will continue to keep a close eye on progress in the Brexit talks as May visits Brussels. Probably there won't be official communication on the progress on specific items, but any comments from the parties involved might be important. Sterling might be sensitive to signs of progress.l

MT technical: Recently, the BoE driven sterling rebound ran into resistance and sterling declined again as markets anticipated that the rate cycle would be very gradual and limited. EUR/GBP trades in a 0.8733/0.9033 consolidation range. Last week, the EUR/GBP rebound ran into resistance just ahead of the 0.9033 range top. We changed our ST bias on EUR/GBP from positive to neutral last week. The 0.9015/33 area might be tough to break short-term.

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