Sterling shows mixed picture post-ECB
EUR/USD declines off key resistance post ECB
On Thursday, EUR/USD traded with a cautious upward bias going into the ECB decision. The euro spiked higher as the ECB announced to reduce to amount of Asset purchases to € 60 bln from April. However the gains were soon reversed into a substantial loss as ECB's Draghi remained very soft on growth and inflation and as the ECB allowed to buy bonds below the deposit yield (if necessary) and now also between 1- and 2-yr maturity. The programme is prolonged to the end of 2017. EUR/USD dropped to low 1.06 area and closed the session at 1.0615 (from on Wednesday). USD/JPY gained on overall USD strength as LT core/US yields rose. USD/JPY finished the session at 114.04, from 113.77.
Overnight, Asian equities trade mixed. The dollar is holding near the post-ECB highs. The trade-weighted dollar (DXY) is holding north of 101. The China November price data were above consensus with the CPI rising from 2.1% Y/Y to 2.3% Y/Y and the PPI increase was even more aggressively rising at 3.3% Y/Y (2.3% Y/Y expected). The data are another indication that inflation is trending higher globally. Japanese equities outperform again as USD/JPY rebounded. It trades in the 114.40 area. EUR/USD is near the post-ECB low (low 1.06 area).
Today, empty EMU calendar, and US wholesale inventories and the Michigan consumer confidence on the US calendar. The Michigan sentiment is interesting as it will give further evidence on the consumer mood in the early post-Trump era and going into the Holiday season. The consensus expects a modest rise from 93.8 to 94.1, but the index already rebounded substantially last month. Even so, we expect a good figure. We don't expect an big market reaction, but a good report might nourish the USD constructive sentiment.
Yesterday, the euro declined as even has the ECB policy decision brought some mixed signals. Lower short-term EMU yields was an important driver for the euro decline. At the same time, there was underlying USD strength supported by higher LT core yields. With the ECB prolonging substantial bond buying at least till end 2017, the Fed keeps the lead in the policy normalization process. This puts a strong floor under the dollar and triggers additional by default USD bond buying, both against the yen and the euro. In a day-to-day perspective, the dollar rally might take a breather after yesterday's rebound and as markets assess the impact of yesterday's ECB measures. In a longer term perspective, the downside of the dollar looks well protected. Short-term interest differentials will remain wide and might even widen more as the Fed extends its gradual normalization process into 2017. From a technical point of view, yesterday's rejected test of the 1.0795/1.0809 area suggests that the topside of EUR/USD is well capped going into next week's Fed meeting. We reinstall a sell EUR/USD on up-ticks bias for return action to the 1.0506 correction low and even to the 1.0458 cycle low.
The technical picture for USD/JPY improved some time ago. The pair took out the key resistance at 111.45/91. Next key resistance at 114.50/115 was tested, but the test was rejected. The pair is currently working through overbought conditions. However, the downside in USD/JPY looks well protected as long as sentiment on risk remains constructive. Even in case of an equity correction, the damage for USD/JPY might be less than previously, as interest rate differentials have become more important.
Sterling shows mixed picture post-ECB
Yesterday, EUR/GBP hovered in a tight sideways range close to mostly slightly north of 0.85. Cable regained some ground on global dollar softness, but the rebound did run into resistance in the 1.27 area. The big moves in EUR/GBP occurred after the ECB policy announcement. EUR/GBP spiked to the 0.8570 area, but in line with EUR/USD almost immediately nosedived back below 0.85 . The pair closed the session at 0.8433 (from 0.8517) Overall USD strength in the wake of the ECB policy decision also weighed on cable. It closed the session at 1.2586 (from 1.2626).
Today, the UK calendar contains the UK trade balance data and the construction out. The trade balance is interesting. The consensus expects a modest narrowing of the trade deficit in October after a big widening in September. Markets might look of indications that the weaker pond helps to ease the negative impact from the external sector on UK growth. However, we don't expect a big positive reaction of sterling on these data. Yesterday, EUR/GBP declined again substantial, but this was a euro move. Sterling sentiment eased earlier this week as Brexit returned as a factor for trading. For now, we see no clear driver from a sterling point of view. However, the recent comeback of sterling seems to have run its course and some consolidation might be on the cards. The topside in sterling is 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. It won't be easy for EUR/GBP to drop below this area and a bottoming out is likely. At least EUR/GBP is still well off this area, even after yesterday's euro setback.
Author
KBC Market Research Desk
KBC Bank
