Sterling in wait-and-see modus

Dollar rally slows, but no meaningful correction yet.

On Monday, the dollar was well bid in Asia suggesting that the USD rally could be extended. Interesting European and US data were unable to provide fuel for further dollar gains. EUR/USD stayed close to, but north of the 1.2662 support. USD/JPY stalled ahead of the 110 barrier. Later in the session, equity selling due to uncertainty on the developments in Hong Kong even put the dollar slightly under pressure.

Overnight, Asian equities still show a mixed picture. Hong Kong and Japanese markets are in the red, but other markets are little changed to slightly higher. So, the direct impact from the protests on markets remains modest. There were also plenty of eco data in Asia. The Chinese HSBC manufacturing PMI was revised downward to 50.2. Japanese eco data were mixed. The jobless rate unexpectedly declined from 3.5% to 3.8%. Retail trade was strong and labour cash earnings were stronger than expected. At the same time overall spending and production were weaker than expected. There was no clear directional reaction in USD/JPY. The yen is marginally stronger, probably due to regional uncertainty. EUR/USD trades little changed in the 1.27 area. The kiwi and the Aussie dollar, under heavy pressure of late, regained some ground this morning.

Later today, the calendar is again well filled on both sides of the Atlantic. In the EMU, CPI is expected to have declined to 0.3%. This is very low, but the risk of a negative surprise is limited after yesterday’s German CPI report. In Germany, the labour market data will show whether recent cooling in the economy already left traces on the labour market. We don’t expect big surprises, but if any, they would be slightly negative for the euro. In the US, then CS house prices, the Chicago PMI and the consumer confidence will be published. We see downside risks for consumer confidence, upside risks for the PMI. So, the data won’t give a clear message for currency trading So, global market sentiment may remain an important driver for USD trading.

Global uncertainty due to the Hong Kong protests and the subsequent safe haven bid of core bonds slowed the rally of the dollar. That said, the impact on global markets and especially on US equities was limited for now. Of course, the outcome of this conflict is again a binary character and over the next days uncertainty might still rise.

The jury is still out, but at this stage we don’t think it will really derail the uptrend of the dollar in a profound way. So, we stay cautious on USD/JPY as long as the uncertainty on Hong Kong persists. The decline of EUR/USD might also slow, but a renewed test of the 1.2662 is still possible if the data point in that direction.

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. The negative deposit rate is a structural negative for the euro. The Fed communication was mixed, but the difference in policy bias and projections of higher official interest rates keep the dollar well bid. The EUR/USD downtrend remains in place and the pair is testing the key 1.2662 support. We are a bid surprised by the pace of the EUR/USD decline. Evens so, the trend remains in place and there is no reason to row against the tide. A sustained break below 1.2662 would bring the 1.2043/1.1877 support in the picture as LT target.

Sterling in wait-and-see modus

On Monday, there was again no big story to tell on GBP-trading. EUR/GBP changed hands in the 0.7810 area at the start of the European trading session and initially held close to this area. Later in the session, cable slightly underperformed EUR/USD (are the UK and sterling more sensitive to what happens in Hong Kong?).

Overnight, UK Gfk consumer confidence was slightly weaker than expected. Until now there is no lasting impact on sterling. Later today, the final revision of the UK GDP and the current account balance will be published. Normally these data are old news and should be largely ignored by the currency market.

Recently underlying sentiment on sterling was not that bad, especially not against the euro. Short-term, we might see a slowdown in the EUR/GBP decline as the pair is nearing the 0.7755 support. Further down the road, the focus for sterling trading should return to the economic fundamentals and to the guidance from the BoE on policy normalization. After the recent rebound of sterling and the soft comments from the BoE minutes, investors are pondering the chances for further sterling gains. In this respect we look out for the UK PMI’s later this week.