EUR/USD near key resistance ahead of ECB meeting

On Wednesday, equities rallied sharply, while core bonds were also well bid as investors prepared for a soft ECB today. Initially, there were no spill-overs to currencies. Later, the decline in core bond yields gradually took its toll on the dollar. EUR/USD trended higher in the 1.07 big figure, but the recent highs were left intact. EUR/USD closed the session at 1.0753 (from 1.0718). USD/JPY also declined in US trading despite a sharp rise of US equities. The pair finished the day at 113.77, from 114.02

Overnight, most Asian equity markets join the rally in Europe and the US yesterday. Chinese indices underperform. The November Chinese trade surplus narrowed as imports (+13% Y/Y in CNY terms) rose more than exports (5.9% Y/Y). The Japanese Q3 GDP was revised down from 0.5% Q/Q to 0.3%; but consumption was upward revised. Global bonds are trading sideways and the dollar remains in the defensive. The trade weighted dollar trades again in the 100 area (compared to a post Trump top slightly north of 102). USD/JPY is changing hands in the 113.55 area (intraday low in the 113.13 area). EUR/USD came close to the recent highs and trades in the 1.0771 area.

There are no eco data of interest for release (see rates section). Regarding the ECB, we expect them to extend the APP at the current €80B/month pace by 3 months. A the same time, some technical parameters will be changed to give them enough room to implement the programme for eventually longer than these three months. The ECB will announce that afterwards the programme is data-dependent instead of time-dependent, allowing a potential tapering of the purchases from mid-2017 onwards. For an in depth analysis of our ECB assessment see the fixed income part of this report and our KBC flash.

Yesterday’s bond (and equity) rally suggests that markets are expecting a soft ECB (and probably also a soft Fed). Regarding the ECB decision, anything less than a 3 or 6 month prolongation of APP will be seen as hawkish. The market will also look for any (subtle) hints on tapering/scaling back unconventional policy tools. Even a prolongation by just 3 months might already cause some nervousness in the interest rate markets as markets could see it as an indication that tapering is coming closer.
So, it won’t be easy for the ECB to surprise on the soft side. Such an outcome might be euro supportive. However, if a rise in European bond yields spills over to global bond bonds, the positive impact on the euro might be limited.

Yesterday and on Tuesday, the EUR/USD rebound took a breather after the short squeeze on Monday. However, the recent top (1.0796) and the 38% retracement of the post Trump-rally (1.0809) are still within reach. We look out whether these levels hold. A break beyond these levels (regardless of the reaction on the bond markets) would be an indication that some further repositioning on the USD rally/euro decline is needed. We wait how the test of this level turns out before reconsidering new/additional EUR/USD shorts.

The technical picture for USD/JPY improved for late. The pair took out the key resistance at 111.45/91. Next key resistance at 114.50/115 was tested last week and earlier this week, but the test was rejected. The pair has moved well into overbought territory. The rally might be ripe for a some consolidation/a modest correction.

EUR/GBP stays away from the recent low

Sterling’s fortune might have changed a bit yesterday. Monday’s rise of EUR/USD pushed EUR/GBP higher. Brexit also returned as a factor for sterling trading. The UK currency used to profit when markets anticipated parliamentary involvement in the Brexit process which would reduce the risk of a hard Brexit. However, this week, it looked that the UK government could remain in control even if parliamentary approval is needed to start Brexit negotiations. PM May asked Parliament to allow the government to trigger Brexit by March2017. In return the government will give (limited?) insight in its Brexit intentions. Sterling faced more pressure yesterday. In addition to the Brexit noise, the UK October production data were also weaker than expected. EUR/GBP jumped north of 0.85, while cable dropped temporary below 1.26 going into the Parliamentary Q&A which didn’t bring much info. The opposition wants clarity on the government’s position first. So, the political stalemate persists.
EUR/GBP set an intraday top of 0.8550 and close the session at 0.8517 (from 0.8454). Cable finished the day at 1.2626.

This morning, the UK RICS House price balance improved from 23% to 30%. Sterling regains slightly ground this morning, but this is rather due to global factors (USD weakness) than anything else. There are no other eco data in the UK today. Sterling sentiment eased earlier this week. The UK currency didn’t profit anymore from the USD rally and Breixt returned as a factor for trading. For now, it is unclear whether both factors will last. That said, we have the impression that the recent comeback of sterling ran its course and that at least some consolidation m:ight be on the cards.
The topside in sterling might become tough. EUR/GBP extensively tested the 0.8333 support on Monday, but a sustained break didn’t occur. The 0.8333/05 area has become an important point of reference. We assume that it won’t be easy for EUR/GBP to drop below this area. We look for confirmation on the bottoming out process.

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