Euro drifting south on Draghi's Jackson Hole comments

Yesterday, the obvious different monetary policy bias between the US on the one hand and Europe (and Japan) on the other hand still dominated trading. It was again highlighted during the Jackson Hole symposium. Markets focused primarily on Draghi’s statement that inflation expectations had dropped significantly. Rising chances for additional ECB easing/QE kept the euro under pressure. In addition, the German IFO business confidence missed expectations illustrating the risk of a further slowdown in the Europe. The US eco data were OK. EUR/USD traded with a downward bias and tried to sustain below the 1.32 handle. The post‐Jackson‐Hole gains of the dollar against the yen couldn’t be sustained.

Overnight, Asian equities don’t joined the US and European risk‐on rally. Most indices show moderate losses. USD/JPY is drifting back below the 104 mark. The decline in EUR/USD slows with the pair returning to the 1.32 area.
Later today, the EMU calendar is empty, but the US one is enticing, with the durable goods orders, house prices, consumer confidence and regional business confidence. We keep a close eye on the durables and on consumer confidence as drivers for USD‐trading. Orders are expected strong (due to transportation).
Consumer confidence might ease after a strong reading last month (multi‐year high). The dollar had a strong run last week as investors expected the Fed to turn more positive on the economy, but Yellen kept a balanced tone at Jackson Hole. The subsequent decline in EUR/USD was at least as much due to euro weakness on Draghi’s soft comments than on USD strength. How strong should US data be for markets to bring forward US rate hike expectations and push the dollar higher again. The meeting of Ukrain and Russian leaders in Minsk is a wildcard for trading on global markets. After the recent USD rally, the bar for further USD gains is rather high. The dollar still needs higher US yields, but bond markets showed resilience of late and longer term yields even dropped. So, a slowdown in the USD rally is possible short term. Even so, there is still no reason to row against the standing EUR/USD downtrend.

In a longer term perspective, the rise of the dollar against the euro stays intact. Last week, EUR/USD dropped below the 1.3296 support, opening the way to the 1.3105 target (Sept 2013 low). 1.2755/1.2662 is key longer term. A more pronounced correction (EUR/USD rebound) is still an opportunity to add EUR/USD short exposure. The EUR/USD downtrend remains intact as long as the pair holds below the 1.3651/1.3700 area, while 1.3296 is the next short‐term target, with the 2013 September low at 1.3105.

Cable sell-off to take a breather?

Yesterday, the UK markets were closed for the Summer bank holiday. Even so, sterling succeeded quite a strong performance against the dollar and the euro.
There was not much news behind the move. Cable changed hands in the low 1.65 area early in Asia but the recent decline of sterling was apparently a bit exhausted. Cable returned to Friday’s levels in the high 1.65 area. The rebound of cable combined with the global downside pressure on the euro pushed EUR/GBP back to the mid 0.79 area. A nice rebound of sterling, but with UK markets closed, it is too early to conclude that the Sterling correction is over.

Today, the calendar in the EMU is empty. In the UK, only the BBA loans for home purchases are on the agenda. Markets and the BoE keep an eye at housing related data, but we don’t expect this report to be a game‐changer for sterling trading. Some volatility might occur in the sterling cross rates (EUR/GBP) as EUR/USD and cable trading might react slightly different to the US eco data due to technical considerations. After the recent setback there might be room for some cable outperformance.

In August, sterling fell prey to profit taking. The UK data turned a bit mixed. Especially ongoing low wage growth helped BoE chairman Carney to fend off calls for early action. At the same time, the BoE minutes showed that two members voted for a rate hike in August. EUR/GBP settled in a 0.7875/0.8035 consolidation range. The sell‐off in cable is in the first place due to dollar strength. EUR/GBP touched a correction top in the 0.8035 area mid‐August, but global euro weakness prevented a further rise. We assume that this area will mark a new strong resistance for the EUR/GBP cross rate. We reinstall a sell‐on‐upticks approach. The 2014 low (0.7874) is the first important support.
We maintain our LT bearish view on the euro with EUR/GBP 0.7755 as a target.