EUR/USD nearing the 1.3105 support

On Friday, trading in EUR/USD and USD/JPY was initially captured in a rather tight range even as there were quite a lot of eco data and as the tensions in Ukraine persisted. EMU inflation was low (0.3% Y/Y), but in line with expectations. European yields stabilized and the euro temporarily rebounded. However, a late session uptick of the dollar after decent US eco data pushed EUR/USD to a new correction low. The yen again didn’t really profit from global uncertainty. USD/JPY held near the 104 barrier.

Overnight, Chinese manufacturing PMI’s were reported marginally weaker than expected and suggest an ongoing sluggish performance in the sector.
Chinese/Asian equities show moderate gains. They apparently hope for further stimulus if needed. During the weekend Russian president Putin pleaded for talks on the statehood of Southern and Eastern Ukraine. Uncertainty on Ukraine and a decent bid for the dollar overall are pushing EUR/USD lower in the 1.31 big figure, with the pair nearing the key 1.3105 support. USD/JPY is still hardly affected by the Ukrainian tensions. The pair even regained the 104 barrier.

Later today, markets will keep an eye at the final EMU manufacturing PMI’s. The preliminary figures were quite disappointing and there is no reason to expect any improvement. So, the data probably won’t help the euro. Aside from the data, there will still be plenty of headlines from Ukraine. The comments from Putin and the reports on the military developments suggest that tensions won’t ease soon. Rising chances of western sanctions could weigh further on the fragile European economy and are a negative for the euro (and for European equities) even as equity futures hold up rather well this morning. Today, the US markets are closed for the Labour Day holiday. This might cause some thin, erratic trading.
On Friday, the CFTC data indicated that the market has raised USD long and EUR short positions in the week till August 26. USD long positions are at the highest level in more than two year. With the EUR/USD trending further into oversold territory, the decline of the pair might slow for now. However, the euro remains vulnerable. The crisis in Ukraine and speculation on further ECB easing going into the ECB meeting will probably prevent a big sustained rebound of the single currency. To conclude: the medium term economic and monetary fundamentals point to a weaker euro and a stronger dollar over time. The Ukrainian crisis is in theory also a negative for the euro. Even so, we stay a bit cautious on the EUR/USD downtrend in a day-to-day perspective as the pair is in oversold territory.

In a longer term perspective, the EUR/USD downtrend stays intact. 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, but we are in no hurry to do so at the current levels. The EUR/USD downtrend remains intact as long as the pair holds below the 1.3345 area.

EUR/GBP heading for the 0.79 barrier

On Friday; sterling started strongly, supported by strong UK eco data. UK GFK consumer confidence improved more than expected and the nationwide house prices were also higher than expected. Cable tried to regain the 1.66 barrier for the third day in a row, but the move again didn’t succeed as a decline in EUR/USD capped the topside in cable too. EUR/GBP set a new correction low just above 0.7930. The decline of EUR/GBP was temporary reversed after the publication of the EMU inflation data. However, overall downside pressure on the euro pushed the pair to the low 0.79 area late in the session.

Overnight, sterling is still in good shape with EUR/GBP nearing the 0.7900 barrier. Cable once again tries to regain the 1.66 barrier. Later today, the focus will be on the UK Money supply and lending data and on the UK August manufacturing PMI. The headline index is expected to show a moderate decline from 55.4 to 55.1, after a rather sharp setback last month. A figure in line with expectations could help the comeback of sterling against the euro. The picture for cable is more balanced as the pair tries to bottom out. A further rebound probably needs a set of strong UK data.

In August, sterling fell prey to profit taking, as the UK data turned a bit mixed. Especially ongoing low wage growth helped BoE’s Carney to fend off calls for early rate 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 was in 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. This area is now a new strong resistance for the EUR/GBP cross rate. We reinstalled 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.