Dollar stabilizes versus euro ahead of US payrolls

Yesterday, initially the dollar was well bid, especially against the yen (thanks also to Kuroda’s softness in the weekend). The USD held also its bid versus the yen during the session to close at a post Yellen high of 103.43. However, against the euro, EUR/USD first went for a test of the technically minor support of 1.1130, with a new short term low of 1.1123, but the tide turned the later in the US session. The pair edged back up to close the session at 1.1158, a daily euro gain of an insignificant 15 pips. The inability to take out support brought the upward reaction. Interest rate differentials barely moved and played no role, as did weaker-than-expected euro area inflation or a solid, but as expected ADP report. The weaker Chicago PMI might have been a trigger for the correction, but a steep fall in the oil price, which triggered some US equity weakness, may have played a role too. Whatever, the EUR/USD daily change was minimal, but it ended a three day winning streak.

Overnight, Japanese data, investment, company profits/sales, were mostly soft with only car sales doing better. Chinese PMI’s were mixed. The official manufacturing PMI rose unexpectedly to 50.4 from 49.9, but the Caixin manufacturing PMI fell to 50 from 50.6. The non-manufacturing PMI dropped to 53.5 from 53.9. So, inconclusive picture. Asian equities are narrowly mixed, suggesting a neutral sentiment for the European open. This is confirmed by stabilizing oil and gold prices and little changed T-Note future. USD/JPY is slightly off yesterday’s highs, while EUR/USD is virtually unchanged. The outgoing Spanish PM Rajoy failed to win the confidence vote in the parliament and needs to look for more support if he wants to avoid another election. It had little impact on the euro though.

All eyes on business sentiment surveys

As traditionally at the first working day of the month, business surveys for the manufacturing sector are on the agenda. According to the first estimate, the euro zone manufacturing PMI weakened slightly in August, from 52.0 to 51.8, while a stabilization was expected. For now, the euro zone manufacturing sector is apparently the most affected by the Brexit decision, although the impact remains subdued for now. After also a weaker IFO and Commission indicators, we see risks for a downward surprise. Also in the US, the manufacturing ISM is expected to have weakened for a second straight month in August, with the consensus looking for a drop from 52.6 to 52.0. Regional indicators were almost all a good deal weaker than expected and therefore we believe the ISM might surprise on the downside too. Finally, US initial jobless claims are expected to have picked up slightly in the week ending the 27th of August, from 261 000 to 265 000. We continue to see downside risks for the claims as labour market conditions are improving further while claims are somewhat off their recent lows.

Regarding trading today, the eco data should be about neutral for EUR/USD, but a big surprise in the US ISM outcome would prime the result of the final EMU PMI’s. We know that Fed’s Mester would like to hike rates and thus this shouldn’t come as a surprise. ECB’s Nowotny (after European closure) is a wild card, but as we got during August very little ECB comments, it would surprise us if he would steal the show today. Initial claims may trigger some late post payrolls positioning, but overall we expect a quiet session with investors mostly sidelined before tomorrow’s payrolls release. Technically, EUR/USD support (Tuesday’s low and 200 moving average at 1.1123) was strong enough in recent days to withstand some attack. The pair has also lost 2 big figures in the past two weeks, which may refrain dollar bulls to force the greenback higher on the day before the payrolls. So modest dollar losses shouldn’t even surprise. EUR/USD should fall below support at 1.1046 to make the technical picture dollar positive. Only a very strong payrolls report may do the trick.

Sterling remains in a tight range versus EUR & USD

Yesterday, sterling traded quite volatile, but gains against the euro (0.8510) and losses against dollar (cable 1.3080) are small. UK eco data had little impact and neither had EMU ones. At the European open EUR/GBP, gradually slid lower mirroring a similar move in EUR/USD. The EUR/GBP decline accelerated when the pair broke below 0.85 level, sending it towards an intra-day low at 0.8473. At the same time cable shot higher to 1.3158 from about 1.31. However, both moves were easily reversed at the start of US dealings, pushing both currency pairs towards opening levels. Later on, sterling remained well bid against the euro leading to a 0.8492 close from 0.8518 previously. Cable eventually ended the day at 1.3138 versus 1.3080 on Tuesday. While the move for cable was insignificant, the upward correction of sterling versus the euro continued with EUR/GBP touching a new correction low (from a major new high above 0.87).

Overnight, EUR/GBP fell a bit further (0.8485).

Today, attention goes to the UK manufacturing PMI. In July the index dropped sharply to 48.2 (contractionary territory) from 52.4 in June, clearly Brexit-induced. The market now expects a slight uptick to 49. Sterling is often not too sensitive for eco data, but the PMI’s are market movers. A weaker figure may stop the sterling correction.

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