EUR/USD consolidates after Monday's risec

EUR/USD started the new quarter with a dull trading session. The pair hovered directionless in a 20 pips range between 1.3680 and 1.37. The EMU data were second tier and thus ignored. The US manufacturing ISM was slightly weaker than expected, but close to expectations and thus also unable to support the greenback. Rallying equities were also unable to give EUR/USD direction. The pair closed the dull session at 1.3679, down 13 pips from Monday’s close at 1.3679..

Overnight, Asian equities trade with a bullish touch, after the S&P and Dow set closed at new records yesterday. The dollar is flat versus euro and yen. US Treasuries trade little changed, while the Bund opened just below 147 this morning. So, FX trading starts the European session ina neutral mode.

Later today, the euro zone eco calendar is thin with only the PPI inflation data. These data are however rather outdated (May) and shouldn’t have a lasting impact on trading. In the US, the focus will be on the ADP employment report, ahead of tomorrow’s payrolls. We see risks for a slightly weaker outcome, which might be slightly negative for the US dollar. Nevertheless, a significant deviation from the consensus is probably needed to have a lasting impact on markets, especially ahead of tomorrow’s payrolls and ECB meeting. The dollar probably needs a strong payrolls report to make a meaningful comeback against the euro and/or the yen.

Following the Fed policy decision, we upgraded our negative bias on EUR/USD to neutral. In a longer term perspective, the gradual rise of the dollar against the euro will probably stay intact. However, short-term we see no trigger for EUR/USD to break below the 1.3503/1.3477 support. The Fed’s soft tone deprives the dollar from further interest rate support. The first short-term reference on the topside was broken Monday. This suggests that the recent consolidation is developing into a short-term correction. In such a scenario, we expect 1.3734 to provide strong resistance. More trading with no clear direction might be on the cards, both for EUR/USD and USD/JPY. The low volatility in the major cross rate might stay for longer.

Cable makes more gains on strong PMI

Yesterday, sterling had another bullish run triggered by a strong manufacturing PMI. It confirms that the UK economy is steaming ahead and supports the view that the BoE will have to raise its benchmark rate before the end of the year. Wider yield differentials are the consequence. On the release sterling rose versus euro and cable, but importantly, it could build its gains further out during the whole session. EUR/GBP closed at 0.7976 from 0.8004 on Monday evening. Cable set new cycle highs, ending at 1.7150, up from 1.7106 on Monday.

This morning, sterling remains well bid at the onset of the European open. Nationwide House prices rose in June by 1.0% M/M and 11.8% Y/Y, well above the consensus estimate of 0.5% M/M and 11.2% Y/Y. Rapidly rising house prices are another concern for the BoE and markets believe it will at some point push the BoE for a rate hike. However, we don’t think the Nationwide report will give sterling much more momentum following yesterday’s stellar performance. EUR/GBP is near the cycle low and cable is at cycle highs. This suggest that without new strong information , the upside of sterling might be limited in a daily perspective. Later today, the UK construction PMI will be published. A marginal decline from 60 to 59.8 is expected. The construction PMI has less market moving power than the manufacturing or services one and therefore we doubt it will help sterling to more gains today.

Recently, the decline of EUR/GBP slowed. This was primarily due to spill over effects from EUR/USD, as this cross rate bottomed out. However, the downside of sterling (both against the dollar and the euro) remains well protected. Some short-term consolidation might be on the cards, especially after mixed signals from the BoE at the Parliamentary hearing. Even so, we maintain our LT EUR/GBP negative bias. 0.7755 (2012 low) is still the key reference level medium term.