GBP off recent lows, but no clear trend

KBC Market Research Desk KBC Bank

Dollar trading mixed, holding recent ranges

Trading on global FX markets showed no clear dynamics at the start of the new week. The dollar gained a few ticks against the euro. Investors are reluctant to add euro longs ahead of the ECB meeting and given the uncertainty on Spain. The initial weakening of the yen after the Abe election victory petered out very soon. Equity weakness during the US session pushed the pair further south. EUR/USD finished the session at 1.1749 (from 1.1784). USD/JPY closed at 113.43 (from 113.52).

Overnight, Asian equity indices are trading marginally stronger despite yesterday's correction on WS. The dollar trades slightly softer as the rise in core/US yields halted. USD/JPY hovers in the 113.25/50 area, near yesterday's intraday low. The euro remains resilient despite ongoing uncertainty on Spain. EUR/USD rebounds slightly and trades in the 1.1760 area. The kiwi dollar traded again volatile. NZD/USD returned temporary to the 0.70 area as the government wants to raise minimum wages. However, the gains evaporated as the New PM again referred to reforming the Reserve bank objective. NZD/USD trades near 0.6940.

Today, EMU and US October PMI business surveys will be released. For the EMU, a slight decline is expected. However, the report still should signal above trend growth. As the ECB meeting nears, we suspect that even in case of a deviation from consensus, the market reaction will be modest. The US manufacturing PMI is expected to have increased in to 53.5 from 53.1 (weak dollar effect?). The services PMI is expected virtually unchanged at 55.2. The US PMI's recently underperformed similar US ISM surveys. We put the risks on the upside of consensus, but don't expect a lasting impact on the dollar.

At the end of last week, the USD momentum improved as investors saw rising chances for a US tax reform, but the USD gains remained modest. Trading in the USD and the euro is paralysed as invent risk (ECB meeting, Spain in EMU; replacement Yellen, Tax reform in the US) makes investors cautious to place directional bets. EUR/USD trades below the 1.18 barrier, but the euro remains resilient given the uncertainty on Spain. For now, the dollar doesn't receive any meaningful additional interest rate support. We started the week with a cautious EUR/USD negative bias. We maintain that call going into the ECB policy decision on Thursday. However, there is no sign that the dollar (EUR/USD and even USD/JPY ) is ready for a technically significant move.

From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern, but there was no sustained follow-through price action, which was disappointing for EUR/USD bears. We maintain a cautious sell-on upticks bias. The pair needs to drop below 1.1670/62 to give comfort to EUR/USD bears. The USD/JPY momentum was positive in September. The pair regained 110.67/95 resistance, a short-term positive. The 114.49 correction top is the next resistance. Sentiment improved further last week, but we still assume that a break beyond 114.49 will be difficult. Yesterday's failed return above 114 confirms this view.

GBP off recent lows, but no clear trend

Yesterday, EUR/GBP was locked in an tight sideways range. The CBI business optimism and orders survey was weaker than expected, but triggered no additional sterling selling. There was also no ‘new news' on Brexit either. EUR/GBP hovered in a tight range marginally north of 0.89, but dipped temporary lower with EUR/USD late in US dealings. The pair finished the day at 0.89. Cable showed no clear intraday trend and finished the session marginally stronger at 1.3198.

Today, there are no important UK eco data. The UK cabinet will meet to discuss the next steps in the Brexit negotiations. However, we don't expect any high profile news. Sterling trade with a slightly positive bias against the dollar and the euro this morning. We don't expect it to go far, unless the euro suffers from political uncertainty (Spain). The BoE probably won't have much room to raise rates beyond the expected November rate hike.

EUR/GBP staged a strong uptrend from April till late August and set a top at 0.9307. Rising UK inflation data and hawkish BoE comments triggered a sterling rebound, but it has run its course. EUR/GBP supports at 0.8743 and 0.8652 proved too difficult to break. The recent rebound above 0.89 improved the ST technical picture of EUR/GBP, but for now there were no convincing follow-through gains. EUR/GBP 0.9026 is 50% retracement of the recent countermove.

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KBC Market Research Desk

KBC Bank

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