Sterling again slightly in the defensive
USD rally blocked as political uncertainty resurfaces
On Friday, interest rates showed some nervous swings, but didn't provide clear guidance for USD trading. US Q3 GDP was OK, but not strong enough to support further USD gains. Late in the session, headlines on a new FBI probe into Hilary Clinton's e-mails reactivated the uncertainty on the Presidential election and weighed on the dollar. EUR/USD jumped to the high 1.09 area and closed the session at 1.0985 (from 1.0897). USD/JPY dropped off the reaction highs in the 105.50 area and finished the session at 104.74.
Overnight, Asian indices are narrowly mixed. The new probe into the Clinton e-mails is a source of uncertainty, but the negative impact on global risk sentiment remains subdued. A further slide in oil prices also weighs on global sentiment.
OPEC and other oil-producing countries failed to agree on measures to cut production. The trade-weighted dollar (98.45 area) rebounds slightly after declining about 0.4% Friday eve on the Clinton headlines. USD/JPY dropped to the 104.30 area, but trades currently again in the 104.80 area. EUR/USD (1.0970 area) trades off Friday's top just below 1.10. So, the dollar feels some additional uncertainty on the outcome of the US election, but investors currently don't see it as a game-changer.
Today, attention goes to the EMU October HICP inflation and the Q3 GDP. Inflation is expected to have risen to 0.5% Y/Y from 0.4%Y/Y. Core inflation is expected stable at 0.8% Y/Y. The national CPI data give us no reason to distance us from the consensus. National Q3 EMU GDP data painted a mixed picture.
Based also on monthly data, EMU GDP Q3 GDP probably grew at its Q2 pace of 0.3% Q/Q and 1.6% Y/Y. In the US the September PI and PCE shouldn't surprise as they were already comprised in Friday's Q3 GDP. The Chicago PMI is expected little changed in October at 54. Last week, the eco data had only limited impact on USD trading. The dollar rally ran into resistance as markets had largely discounted a December Fed rate hike. The headlines on the Clinton probe caused some USD profit taking, but the recent top in the (trade-weighted) dollar remains within reach. Today's US data won't have a lasting impact on the dollar. Investors will await other US eco data (ISM tomorrow; payrolls on Friday) and the Fed communiqué Wednesday. We also look out whether uncertainty on the US elections will block the global bond sell-off. If the rise in global yields halts, the topside of the dollar might also become more difficult. So, we start the week with a ST neutral dollar bias. As long as politics doesn't profoundly change expectations for a Fed rate hike , the downside of the dollar remains probably protected.
From a technical point of view, EUR/USD dropped below 1.0952/13 support. This was USD positive and opened the way to next support (1.0822/1.0711).
However, Friday's rebound questions the room for more sustained USD gains short-term. Even so, we maintain a EUR/USD sell-on-upticks bias. USD/JPY finally broke above the 104.32/64/87 resistance on Thursday. This break painted a double bottom formation on the charts with targets in the 108/109 area. We were cautious to pre-position for higher USD/JPY, as we feared that a rise in global volatility could prevent a further yen decline. However, the rise in core yields dominated as a driver for USD/JPY. So, we change our ST assessment on USD/JPY from cautious to positive. We look out for the effect of rising political uncertainty. For now it doesn't change the broader picture.
Sterling again slightly in the defensive
On Friday, after initial technical trading, sterling temporary spiked lower as a North Irish Court decided that no approval from lawmakers is needed to start the Brexit process. The ruling gives the government some more decision room and raises chances on a hard Brexit. EUR/GBP jumped temporary north of 0.90. Cable filled bids in the 1.2115 area. However selling pressure on sterling eased later in the session. The Clinton headlines were slightly mixed for sterling. Cable rebounded on USD weakness, but EUR/GBP traded slightly stronger in line EUR/USD on global uncertainty. Cable finished the session at 1.2185 (from 1.2164). EUR/GBP closed the session at 0.9004 (from 0.8958).
During the weekend there were several press articles with various views on whether BoE governor Canrey will finish his full mandate or resign early. Sterling traded weaker at the Asian open, but trades currently again near Friday's closing levels. The Lloyds Business barometer was strong at 37 (from 24). Today, the UK Money supply and lending data will be published. Consumer credit held up reasonably well of late. If confirmed, it might be slightly sterling supportive. At the end of last week, a sterling rebound ran into resistance, even as the eco data were okay. Political event risk remains a ongoing source of sterling uncertainty and caps any protracted rebound. A rise of global uncertainty won't help sterling. We look to sell sterling on more pronounced up-ticks. EUR/GBP 0.8725 remains a key reference.
Author
KBC Market Research Desk
KBC Bank
KBC's Market Research Desk publishes a number of short-term reports.
