Sterling withstands mini Brexit-storm

Key US data to decide on next USD move?

Yesterday, the USD bottomed after a decline earlier this week. Especially EUR/USD declined modestly off yesterday morning's correction top. USD/JPY continued to trade with cautiously negative bias. A further decline in US jobless claims and rise in the core US PPI were slightly supportive for the dollar. EUR/USD finished the session at 1.1830 (from 1.1859). USD/JPY closed the session at 112.28 (from 112.50).

Overnight, Asian markets extend gains despite a minor decline in the US yesterday evening. Chinese export and imports rose sharply, suggesting good economic activity. There is again a ‘disconnect' between rising Japanese equities and USD/JPY. The latter still struggles not to fall below the 112 barrier even as the Nikkei surpassed the 21 K barrier. The dollar is also losing a few ticks against euro. EUR/USD trades in the 1.1845.

Today, US inflation, retail sales and Michigan consumer confidence have potential to move the dollar. CPI inflation likely increased sharply, especially due to higher gasoline prices. We keep a close eye on core inflation. It showed signs of bottoming out in August. The core might surprise on the upside (expected 1.8% Y/Y up from 1.7% Y/Y previously). Retail sales are expected very strong (1.7% M/M). Car sales rebounded and sales at gasoline station should have done well (price effect). Core sales should also have rebounded. Given the high expectations, we side with the consensus. A strong set of US eco data, if confirmed, would further galvanise expectations that the Fed will increase rates in December and maybe stimulate markets to discount more rate hikes in 2018 than hitherto. Aside from the data there is still plenty of political event risk that might interfere on markets (Catalonia, elections in Austria, the impact from Trump cutting off subsides for Obamacare and a declaration of president Trump on Iran). The impact of each of these factors will be different. An event turning into a risk-off sentiment might be negative for the dollar (e.g. Iran). 

After a cautious comeback, the dollar lost again ground this week. USD investors want concrete news on the tax reform, on the economy and on the Fed's rate intentions. The absence of progress on these issues caused some "by-default" USD selling. Today's retail sales and CPI might bring some positive economic news. However, the consensus already expects strong data.

So, we look out whether they are good enough to put a more sold floor under the dollar. After this week's disappointing USD performance, there is no guarantee for success. Especially the USD/JPY performance is a bit worrisome. We first want a sign that the dollar secures solid interest rate support before considering to add USD longs.

From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern last week, but no real test of the 1.1662 support occurred. On Wednesday, the pair even returned above the 1.1823 previous range bottom, which was disappointing for EUR/USD bears. If EUR/USD doesn't resume its gradually downtrend after today's US data, we have to leave our short-term sell-on upticks bias. In that scenario, the 1.20/1.2092 levels might come again on the radar. The USD/JPY momentum was constructive of late, but for an important part due to yen weakness. USD/JPY regained 110.67/95 (previous resistance), a short-term positive. The 114.49 correction top is the next important resistance. The rally clearly lost momentum last week. So a break beyond 114.49 is difficult.

Sterling withstands mini Brexit-storm

Yesterday, Brexit again dominated sterling trading. Early in the afternoon, the UK currency was sold off as EU Brexit negotiator Barnier said that the state of the negotiations doesn't allow him to recommend the start of talks on post-Brexit UK/EU trade relationships at next week's EU summit. Barnier especially spoke very harsh on the financial separation bill as he said the negotiations on this topic were in a deadlock. The comments pushed sterling off a cliff. EUR/GBP jumped north of the psychological barrier of 0.90. However, later in the session sterling recouped the losses on press headlines the EU would reveal preparations for a transition period next week. EUR/GBP finished the session at 0.8919. Cable finished the session also with a small gain at 1.3262.

Today, there are no important UK eco data. So, markets might further adapt positions in the wake of yesterday's Brexit debate. The hope for a modestly constructive attitude at next week's EY U summit might give sterling some temporary downside protection.

EUR/GBP staged a strong uptrend since April to set a top at 0.9307 late August. UK price data and hawkish BoE comments reinforced a sterling rebound. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of euro strength and sterling softness to persist. The prospect of (limited) withdrawal of BoE stimulus triggered a good sterling countermove, but this rebound has run its course. EUR/GBP supports at 0.8743 and 0.8652 are difficult to break. We look to buy EUR/GBP on dips. Last week's rebound above the 0.89 area improved the ST technical picture of EUR/GBP. EUR/GBP 0.9026 is the 50% retracement of the recent countermove.

Download The Full Sunrise Market Commentary Currencies