Euro rebound halts as markets await the ECB decision

KBC Market Research Desk KBC Bank

On Tuesday, global (currency) trading shifted into wait-and-see modus after Monday's impressive euro short squeeze. EUR/USD initially tried to extend its comeback, but failed to take out Monday's top just below 1.08. Data and interest rate differentials failed to give clear guidance. Some cautious dollar strength returned later in the session. EUR/USD closed the day at 1.0718 (from 1.0764 on Monday). USD/JPY finished the session at 114.02 (from 103.85).

Overnight, Asian equities are supported by the yesterday's constructive risk sentiment in Europe and the US. However, the gains are modest. Japanese equities again slightly outperform as the yen stays relatively weak. USD/JPY returned north of the 114 pivot (currently trading near 114.20). The Australian Q3 GDP unexpectedly dropped by -0.5% Q/Q, reducing the Y/Y growth rate to 1.8% (-0. 1% Q/Q and 2.2% Y/Y was expected). The RBA expects growth to pick up again in the fourth quarter. Even so, markets see again a higher probability of a rate cut. The Aussie dollar dropped from the 0.7480 area to the 0.7420 area. Core yields show no clear trend overnight. EUR/USD is holding a very tight range in the 1.0720 area.

Later today, the Euro area calendar contains only Italian unemployment and Spanish house prices, no market movers. In the US, only the JOLTS job openings report and consumer credit are released, but these are also no market movers. The Canadian central bank meets, but analysts don't expect a rate change.

Yesterday, the euro short-squeeze ran into resistance ahead of the EUR/USD 1.08 level and the euro returned part of Monday's gains. At the same time the dollar holds relatively strong, suggesting that the post-Trump reflation trade puts a solid floor for the US currency. Today, there are few drivers for trading in EUR/USD and USD/JPY. Interest rate differentials and global risk sentiment will have to do the job. However, US yields are in consolidation modus and European bond investors will probably also take a wait-and-see approach ahead of tomorrow's ECB meeting. The ongoing positive risk sentiment might be slightly USD supportive, especially for USD/JPY. Basically, we expect more consolidation both for EUR/USD and USD/JPY today.

From a technical point of view, EUR/USD cleared intermediate support at 1.0851 and 1.0711 (2016 low). The pair set a minor new low below 1.0524/18 support on Monday, but was captured by an impressive short squeeze later. The 38% retracement from the Trump decline comes in at 1.0809. We look out whether this first important resistance holds going into the ECB meeting. If the level holds, new EUR/USD shorts can be considered. The technical picture for USD/JPY improved too. The pair took out the key resistance at 111.45/91. Next key resistance at 114.50/115 was tested last week and yesterday, 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

On Tuesday, sterling trading also entered calmer waters after Monday's swings in EUR/GBP and was driven by global price moves. European politicians again tried to convince the UK not to wait too long to start Brexit negotiations and to give insight in what kind of Brexit the UK government intends to realise. However, the the headlines had no big impact in sterling trading. EUR/GBP drifted up and down on the various Brexit news items, but finished the session almost unchanged at 0.8453. Cable was initially captured in a relatively tight sideways range in the mid 1.27 area, but declined later to close the session at 1.2678.

Today, the Halifax House prices, UK production data and the NIESR GDP estimate will be published. UK production data are expected to confirm the scenario of modest growth, but we don't expect it to be of big importance for sterling trading. UK traders will keep an eye at the political debate as the UK government looks prepared to give more insight in its Brexit position ahead of the activation of article 50. However, the impact of the new approach for the Brexit process is unclear and didn't help sterling yesterday. Of late sterling mostly profited on headlines of a bigger Parliamentary involvement. Will this change? 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. Yesterday's price action was still modestly euro positive/sterling negative and this trend continues morning. Can this area put a floor under the recent EUR/GBP decline?

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KBC Market Research Desk

KBC Bank

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