Sterling enters calmer waters, for now

USD remains in the driver’s seat

On Friday, in absence of macro data to guide trading the dollar remained in favour. EUR/USD declined further after breaking the post-Brexit low as markets expected an extending of APP beyond March 2017. EUR/USD closed the session at 1.0884 (from 1.0929 on Thursday). USD/JPY lagged the overall USD rally as global investor sentiment was a bit fragile. The pair finished the day at 103.80 (from 103.95).

Overnight, Asian equities trade in positive territory with Chinese equities outperforming, even as the yuan declines further and as capital outflows rise. The off-shore yuan trades near the historic lows. The CNY trades at 6.7736, the weakest level in more than six years. Its decline is mostly due to USD weakness, but it also helps the Chinese economy to regain competitiveness. In a broader perspective, the dollar is holding strong, with the trade-weighted dollar reaching the highest level since February. EUR/USD trades in the 1.0865 area; near the recent lows. USD/JPY stabilizes in a tight range close just below the 104 area. Japan September trade data were better than expected, but had no noticeable impact on currency trading.

Today, in EMU attention goes to the October PMI’s. The composite indicator is expected to have increased slightly to 52.8 from 52.6 previously. During the first three quarters of the year, the composite PMI averaged around 53. In August and September the index twice fell by 0.3. We expect the downmove to have stopped in October with the composite index again close to 53. Especially, Germany should contribute to the advance as the recent fall in the German PMI looks too big. The IFO is actually higher than three months ago after a strong jump in the last month. So, maybe there is a upside risk for the overall EMU PMI. We expect the impact of the PMI’s on Euro trading to be limited. In the US there are only second teir eco data on the agenda. The deal between AT&T and Time Warner might be slighlty supportive for equity sentiment and dollar.

At the end of last week, the dollar exttended its rebound as markets saw ongoing policy divergence beteen the Fed and the ECB after the ECB press conference. December Fed rate hike expecations put a solid floor for the US currency.

The euro declines as the ECB is expected to maintain a loose policy beyond March 2017 (no abrupt end to APP). Most other major central banks will probably lag the Fed on the way to policy normalisation. This insight isn’t new. The dollar rally won’t continue forever, but for now interest rate support causes by default USD buying. There is no reason to row against the USD positive tide, especially not in EUR/USD.

From a technical point of view, EUR/USD finally dropped below 1.0952/13 support. If confirmed, the break would be a further USD positive and open the way to next intermediate support (1.0822/1.0711). USD/JPY struggles to break north of 104.32/64. A break would paint a double bottom formation on the charts with targets in the 108/109 area. We stay cautious on sustained USD/JPY gains beyond the 104.32/65 resistance especially as global volatility/uncertainty would intensify.

Sterling enters calmer waters, for now

On Friday, moves of sterling were modest. Some ‘minor’ issues triggered a gradual, temporary intraday decline of sterling . BAT’s bid for the outstanding shares of Reynolds was slightly negative for sterling (especially against the dollar). Mid-morning, the monthly UK public finance data added to the sterling-sceptical sentiment. The budget deficit was substantially wider than expected and questions whether the government has room to support the economy in case of an economic setback due to Brexit. The budget data reinforced the intraday sterling decline. The fragile risk sentiment and negative headlines on the Brexit process coming from the EU summit didn’t help sterling neither.
EUR/GBP touched an intraday top in the 0.8940 area, but the pressure on sterling eased later in the session. The pair closed the session at 0.8900 (from 0.8920). Cable finished the day at 1.2234, all in a tight sideways range.

During the weekend, there were press headlines on Banks preparing scenario’s to move part of their activity out of the UK. For now, the negative impact on sterling is limited. Later today, CBI trends total orders will be published. A stabilisation (-5) is expected. We expect the impact of the report to be only of intraday significance. Sterling entered calmer waters last week. This process might continue short term. The UK currency even rebounded slightly as markets assume that more Parliamentary involvement will reduce the risk of a hard Brexit. However, we don’t expect this rebound to go far. We look to sell sterling on more pronounced up-ticks.

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