EUR/USD sets new 2014 low

Yesterday, the euro was under downward pressure against all other major currencies and also against many regional currencies. The move was technically relevant in EUR/USD which dropped below the 2014 low (support). EUR/JPY approached similar support (1.3623) and this was also the case for EUR/GBP (0.7886). USD/JPY was little changed at 101.46.

While it is always difficult to pinpoint the exact trigger for the move, we think it was due to the combination of fundamentals and technicals. The economic dataflow from the euro area had been really uninspiring as of late. The revelation (on Monday) by the Buba that even the motor of the euro zone economy, the German economy sputtered (flat Q2 German GDP), was enough to lose faith in the single currency. Indeed, the prospect of more ECB action, or in absence of such stimulus, of a lethargic economy (Japanisation) weighed on the still strong euro. Technical-inspired traders were already for some time on the outlook to test the 2014 low (1.3477) and were only too happy to jump in when this level came into sight. Of course, we need a confirmation of this break today to give it its full value. The importance of the technicals was obvious, as the break came after the slightly softer than expected US inflation data, which should have helped the euro. EUR/USD did rise briefly, but it never came above 1.3490, which was the sign for technical-inspired market participants to start selling again. This time the pair broke through the 1.3477 support and fell to about 1.3460. The mid-morning US data were stronger, but had no real impact anymore. The pair settled in a tight range and closed at 1.3466, where it still trades in the run-up to the European session.

Today, the eco calendar is thin with only the first estimate of European Commission’s consumer confidence for July and the first quarter EMU government deficit data. In June, European Commission’s consumer confidence weakened unexpectedly, from -7.1 to -7.5. Following the limited drop, the consensus is looking for a stabilization at -7.5 in July. We believe however that the risks remain for a weaker outcome as increased geopolitical tensions might weigh on sentiment together with the disappointingly slow economic recovery. If our assessment is correct, it might weigh on the euro, as it would confirm the weak euro sentiment.

Overnight, EUR/USD traded flat, USD/JPY is marginally lower as is EUR/GBP. These small changes give us few clues about trading further out. Most Asian equities are trading with modest to moderate gains, but Japanese equities are about flat. Sentiment on risk seems quite neutral, but the cancellation of air traffic towards Tel Aviv shows that the situation remains tense and might escalate again. The impact of risk-off/risk on corrections on currencies is not straightforward, but we consider risk-off as euro negative and risk-on euro positive. The main question will be whether EUR/USD confirms the break.

In a longer term perspective, the gradual rise of the dollar against the euro will probably stay intact. We didn’t see a short-term trigger for EUR/USD to break below the 1.3503/1.3477 support, but yesterday’s price action suggests that a clear trigger is not always needed to break key technical levels. As it fits in our longer term view, we don’t complain. Nevertheless, we still want a confirmation of the break. Don’t forget that the Fed’s soft tone deprived the dollar from extra interest rate support. Even strong US payrolls and/or the mini-Portuguese crisis were unable to push EUR/USD out of the consolidation pattern. Therefore, a confirmation of the break would give us more comfort.

EUR/GBP testing 2014 lows

Yesterday, sterling profited from the overall euro weakness. EUR/GBP closely mirrored the moves in EUR/USD, but sterling was just a touch weaker versus the dollar. So, EUR/GBP slid substantially in the morning session, but also after the US CPI, when EUR/USD forced the break of a technical support level. Towards the end of the session, cable erased even most of the small intra-day losses. EUR/GBP closed the session at 0.7891, a fraction away from the 2014 lows and down from the previous close of 0.7920. Cable closed at 1.7065, marginally below 1.7075 low on Monday. The UK CBI Industrial Trend survey was weaker than expected, but never played a role in trading.

Today, the UK calendar contains the CBI Distributive trades report and the BoE publishes the Minutes of the July meeting. BoE president Carney speaks in Glasgow. Regarding the Minutes, there is some speculation that at least one governor voted against keeping the Bank Rate unchanged. If the decision is unanimous, it would be negative for sterling, especially against the dollar. Indeed, cable shows signs of rolling over and therefore there are risks for more profit taking in cable. EUR/GBP remained well bid overnight with a new 2014 low (0.7885) as the result. In case the Minutes show one or two dissents (in favour of higher rates), EUR/GBP may be in for another down-leg. The speech of BoE president Carney is a wild card. In past weeks, he blew often warm and cold regarding the timing of the first rate cut.

Recently, EUR/GBP stayed near the cycle lows and it even set a minor new low overnight. The UK news has been a bit more mixed recently and while that didn’t prevent yesterday’s gains, we remain cautious short term. Following the strong run in past weeks, we fear sterling needs some more consolidation. Hawkish Minutes and/or overall euro weakness may postpone this expected pause in the sterling rally. There is no reason to go against the trend though. We maintain our LT bullish view on sterling with EUR/GBP 0.7755 as a target. However, to set-up new sterling positions we maintain a sell-on-upticks tactic for EUR/GBP.