USD/JPY ascent runs into resistance

On Friday, the absence of eco data didn’t prevent some sharp swings across markets, including in the currency market. The euro was under pressure as high LTRO repayment fuelled expectations on ECB QE further down the road. A referendum on Catalonian independence weighed, too. USD/JPY fell prey to profiting taking, returning below 109.

Overnight, Asian equities start the week in risk-off modus. The G20 in Australia this weekend suggested that more is needed to support growth, but at the same time warned on asset bubbles. There is also lingering uncertainty about Chinese growth and the ability of authorities to provide more stimulation, if necessary. Lower core bond yields are weighing on the dollar. USD/JPY is returned below the 109 mark. EUR/USD touched a correction low in the 1.2826 area overnight, and is again changing hands in the 1.2850 area at the moment of writing.

Later today, global factors and technical considerations will prime. The risk-off modus in Asia will probably spill over into European markets. Investors will look out for timely indicators on growth in China and in Europe later this week (PMI’s/Ifo). Regarding today’s data, the calendar is modestly interesting. In EMU, consumer confidence (EU Commission) will be published. A small further setback is expected. In the US, the August existing home sales are usually only of intraday importance. However poor figures might add to global uncertainty. Of late, global risk-off sentiment tends to weigh on the dollar, and in particular on USD/JPY. For EUR/USD the picture is far less clear. Overall dollar weakness in case of lower bond yields sometimes affects EUR/USD, too. At the same time, the topside of the euro is well capped as markets continue to see a rising chance that the ECB will have to start QE (government bond purchases) to reach its inflation target and to expand its balance sheet. Any upticks in EUR/USD will remain rather limited and short-lived.

From a technical point of view, USD/JPY last week extended its rally after the break of the key 105.44 resistance. The Fed statement was balanced, but the rate projections suggest that the dollar might get additional interest rate support in the short-to-medium term. At the same time, the yen remained in the defensive as markets see a decent chance of more BOJ easing down the road. The pair set a correction at 109.46 on Friday morning, but ran into resistance as core bond yields declined later in the session. 110.66 is still the next important resistance. We had a positive bias on USD/JPY. However at the end of last week, we indicated that the pair was is moving well into overbought territory after the recent rally. It is too early to call a real trend reversal, but the short-term some consolidation/correction might be on the cards. So, the 110 barrier and the 110.66 resistance might be tough to overcome short-term.

The technical picture of EUR/USD deteriorated further after the break below the key 1.3105 level (Sept 2013 low). This level is now the new resistance that will be difficult to regain. The negative deposit rate is a structural negative for the euro. The Fed communication was mixed hawkish, but the difference in policy bias and projections of higher official interest rates keep the dollar well bid. In a longer term perspective, the EUR/USD downtrend remains in place. 1.2755/1.2662 is the next key support. A more pronounced correction (EUR/USD rebound), is an opportunity to add to EUR/USD short exposure. The recent consolidation helped the market to digest the post-ECB oversold conditions.

Sterling longs squeezed after “No” vote

On Friday, technical repositioning in the wake of the Scottish referendum was the main driver for sterling trading. The least one can say is that GBP markets were well prepared for a “No” vote. The sterling lost sharply against the dollar and even against the euro, which was also under pressure. Cable lost about two big figures off the morning top. EUR/GBP regained some ground, too. Even so, EUR/GBP still struggles to regain the previous range bottom at 0.7875.

Later today, the monthly UK public finance data will be published. We expect those data to have only a limited impact on trading. So, global factors will set the tone for sterling trading. On Friday, sterling investors faced a remarkable buy-the-rumour, sell-the-fact reaction of sterling in the wake of the Scottish referendum. Stale GBP-longs were forced out of their positions. This move should be more or less worked out by now. A slowdown of the global USD rally due to lower core bond yields might give cable some downside protection, at least temporary. At the same time, we don’t see much upside for the euro against sterling as long as market speculation on more QE from the ECB continues. We reinstalled a cautious sell-on-upticks bias for sterling after the Scottish “No” and maintain that strategy.