Dollar still holding tight ranges

On Friday, the major dollar cross entered calmer waters as the post-Fed repositioning had run its course. EUR/USD and USD/JPY held tight ranges close to 1.12 and 101 respectively. A slightly softer than expected EMU PMI didn’t affect currency trading in a lasting way. EUR/USD gained a few ticks after the close of the European markets. Remarkably, this euro gain/USD decline more or less coincided with a decline of oil at that time. Even so, trading remained within the established ranges. EUR/USD closed the session at 1.1226 (from 1.1208). USD/JPY finished the day at 101.02 (from 100.76).

Overnight, Asian equity indices show losses of about 0.5% to 1.0%. The correction is probably profit taking on the post-Fed/BoJ rally, as was the case in the US on Friday. Friday’s steep decline of oil probably was also still at play. There is not that much of high profile news to guide global trading this morning. Markets ponder the chances of the OPEC reaching a deal on production cuts later this week. However, for now there is no clear direct impact on USD trading. EUR/USD trades in the 1.1230 area. USD/JPY changing hands in the 101 area. Both are still very close to the levels that were on the screens last week.

Today, the German IFO business climate and the US New home sales are on the agenda. For the IFO a near stabilization of the headline business climate at 106.3 is expected. The German PMI deteriorated to 52.7 from 53.3, due to declining services sentiment. The Bundesbank also warned for a slowdown of the German economy in H2. Therefore, we put the risks on the downside of expectations. In the US, new home sales are expected to have dropped 8.3% in August following a huge 12.4% rise in July. A retracement in line with consensus looks reasonable. Anyway, given the volatility in the series, the market reaction should be subdued even in case of a downside surprise. Regarding central bank speakers, Tarullo and Kaplan are dovishly oriented and supported the Fed’s wait-and see decision. ECB Draghi speaks before the EU Parliament. He said little on the ECB policy recently. ECB Committees are tasked to review the policy and look whether changes in the implementations are needed. With the Fed standing put, Draghi shouldn’t feel the pressure to say much in the next weeks on policy. In a daily perspective, there is no single clear driver for USD trading. Soft data and a risk-off sentiment might keep core bond yields and the dollar under slight pressure. Draghi staying muted on more easing might be slightly euro supportive. Oil and the US presidential debate are wildcards. So, we put the risk for a slightly softer USD today, but with no reason to break out of recent ranges.

EUR/USD tested the 1.1123 support before the Fed, but the test was rejected as the Fed stayed in wait-and-see modus. We assume that the Fed decision hasn’t changed the broader picture for EUR/USD. Markets will be sensitive whether the data support the case for a December rate hike. Swings in December rate hike expectations will probably be the driver for USD trading. The dollar might lose slightly further ground short-term, but as long as the market implied probability of a Fed rate hike remains at current levels, the downside of the dollar looks well protected. We prefer more range trading in the 1.1123/1.1366 range and a sell-on-upticks approach. USD/JPY remains in the defensive after the BOJ meeting. The post-BOJ decline of the yen was very short-lived and reversed very soon. We stay cautious on USD/JPY long exposure. However, the 99.54/99.02 area will remain a strong support. 104.32 is the first main resistance. We expect the established 99.89/104.32 range to hold, but downside risks have grown post BOJ/FED.

Sterling still haunted by political uncertainty

On Friday, there were no UK eco data. However political uncertainty on the pace and the nature of the Brexit process sparked again investor uncertainty. This time comments from UK’s Boris Johnson, that article 50 could be triggered early 2017 and that the exit process could take less than two year, probably weighed on sterling. That’s sooner than markets assumed until now. It’s difficult to see whether this was the only reason for the decline of sterling. Whatever, sterling remained under (political) pressure. EUR/GBP rebounded to the 0.8675/80 and closed the session at 0.8659(from 0.8571). Cable dropped temporary below last week’s low (1.2950 area) but closed the session at 1.2966 still a substantial on a daily basis (from 1.3078).

During the weekend, UK’s Johnson made some more balanced comments on the timings regarding the Brexit process. However, for now it doesn’t help sterling much. Later today, the BBE loans for home purchases are on the agenda. A modest further decline to 37 100 is expected. A poor figure might be slightly negative for sterling. Even so, the broader political debate might be more important for GBP trading. A cautious global sentiment on risk is usually also a negative for sterling. So, we expect sterling to stay in the defensive. The fear for a hard Brexit might still resurface/stay in place. In this context, we don’t expect any GBP rebound to go far. A sell sterling on upticks approach remains preferred. 0.8725 is the first important target on the EUR/GBP charts.

Download The Full Sunrise Market Commentary Currencies