Test of 1.3477 support. No follow-through action yet

Yesterday, tight sideways trading dominated the EUR/USD and USD/JPY crosses, as no eco data of importance were released and no key headlines news hit the wires. EUR/USD held a 1.3455 to 1.3475 range. USD/JPY dropped to the 101.32 area during the morning trade in Europe, but reversed the early losses as US equities headed further into record territory.

This morning, the China HSBC manufacturing PMI improved more than expected to 52.0 from 50.7. Chinese equities outperform the rest of Asia, but the gains are moderate. EUR/USD and USD/JPY are still near yesterday’s closing levels. The Reserve bank of New Zealand as expected raised its policy rate by 0.25% to 3.5%. Following four rate hikes, the bank will now pause to see its impact on the economy. It also warned for a possible significant drop of the Kiwi dollar, whose level is too high. The NZD dollar nosedived this morning. The NZD/USD cross rate dropped more than one big figure and is trading below 0.86 now.

Today, the eco calendar heats up, both in the US and euro zone with the first estimate of the euro zone PMI’s for July and the US jobless claims and new home sales. In July, the euro zone PMI’s are forecast to stay broadly unchanged. The consensus is looking for a marginal drop in both the manufacturing and services PMI, from 51.8 to 51.7 and 52.8 to 52.7 respectively. Both the manufacturing and services PMI weakened last month and we believe that another downward surprise is not excluded, especially as geopolitical tensions probably weighed on sentiment. In the US, jobless claims are forecast to have picked up slightly in the week ending the 19th of July. Finally, following a sharp increase in May, US new home sales are expected to have dropped again in June. The consensus is looking for a decline by 5.8% M/M to 475 000, following an 18.6% M/M jump in May. We see risks for a stronger decline following the jump in May as new home sales continue to be constrained by limited inventories, which are however slowly increasing. The EMU PMI’s are the most relevant release for global (currency) trading. Another disappointing figure will illustrate the different growth momentum between the US and Europe and weigh on the euro. Global equity futures show no outspoken trend, but some consolidation after yesterday’s rebound is possible. Lingering geopolitical tensions might be a slightly negative for the euro, too.

In a longer term perspective, the gradual rise of the dollar against the euro will probably stay intact. Earlier, this week, EUR/USD dropped below the 1.3503/1.3477 support even as there was no clear trigger. For now, there is no follow-through price action. The move fits our long term view, but we still want a confirmation of the break as the Fed’s soft tone deprived the dollar from extra interest rate support of late. We maintain a sell-on-upticks bias for the EUR/USD cross rate.

UK retail sales key for next move of sterling

Yesterday, the release of the UK Minutes of the latest BoE meeting was the focal point for sterling trading. Before the release, sterling was well supported. EUR/GBP fell from levels around 0.7890 at the open to 0.7875, setting a new cyclical low. Cable rose from 1.7065 to 1.7095. Markets clearly expected hawkish minutes maybe showing already one or more governors dissenting in favour of higher rates. However, the minutes disappointed the sterling bulls.
EUR/GBP erased its losses and even made some daily gains topping at 0.7906, while cable fell to 1.7030. For EUR/GBP, the turnaround was technically relevant, as the initial move lower qualifies as a failed test of the 0.7988 low.

Today, the UK retail sales will be published. A rebound (0.2% M/M) after last month’s setback (-0.5% M/M) is expected. There were some mixed signals from the UK retail sector of late. However, for today’s report, the reference of the consensus is rather low, we think. Even so, another negative surprise could herald some consolidation on the recent rally of sterling against the euro. Of course, the EMU data remain a wildcard for EUR/GBP trading, too. The momentum of cable already eased of late due to a better performance of the dollar.

Recently, EUR/GBP stayed near the cycle lows and it even set a minor new low yesterday. The UK news has been a bit more mixed recently and while that didn’t prevent some further sterling gains, we remain cautious short term. Following the recent gains, we fear sterling needs some more consolidation. 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 long sterling positions we maintain a sell-on-upticks tactic for EUR/GB.