EUR/GBP returns north of 0.80

Dollar massively losing interest rate support

On Tuesday, the euro was hit by poor data from the EMU and UK/Norway.
Yesterday, the dollar faced a similar experience. US data including retail sales and PPI inflation missed the consensus by a substantial margin. Disinflation fears returned to the US and haunted the dollar. EUR/USD jumped beyond the 1.2791 resistance. USD/JPY fell (temporary) in a black hole and touched bids in the low 105 area, before rebounding.

Overnight, the performance of most Asian equities indices is constructive. Mainland China shows even some moderate gains. Yesterday’s setback of USD/JPY weighs on Japanese equities (-2.0 % +), even as USD/JPY is off yesterday’s intraday lows. The dollar remains also week against the euro. EUR/USD is again north of 1.28, even as US equities regained a substantial part of the intraday losses late in the US trading session. Of course, with the US 2-year yield below 0.3%, the dollar lost a big part of its interest rate support.

Later today, the final August EMU CPI is expected unchanged from the advance reading (0.3% J/J). A confirmation is likely, but a downward revision to 0.2% could trigger renewed turmoil, this time on the euro side of the equation. We also keep an eye on the peripheral spreads. Yesterday, there was a substantial blow-out of Greek, Portuguese and to a lesser extent Italian spreads. For now, this didn’t stop the rebound of EUR/USD due to the global dollar sell-off and the unwinding of euro funded carry trades. However, more spread widening could turn the focus back to Europe. Regarding the US, the data the risks should be more balanced. Jobless claims are expected to remain low. Industrial production is expected to grow 0.4% M/M, but we see upside risks. For the Philly Fed business outlook and the NAHB housing index, we see slight downside risks. Will today’s data be good enough to prevent a further spreading of panic? Was yesterday’s mini-crash a short term exhaustion move? The jury is still out. As mentioned earlier, we keep a close eye on the US 2-year yield. If the rout halts, it should slow the decline of the dollar, especially against the euro. We want to reinstall EUR/USD shorts, but are reluctant to already rush in.

From a technical point of view, USD/JPY came close to the key 110.66 resistance, but the rally finally ran into resistance. The difference in monetary policy between the US and Japan should be supportive for USD/JPY longer term. However, short-term the pair is in correction modus.

The reaction of USD/JPY (and of US bond yields) after the payrolls and after the Fed Minutes also suggests that the topside in USD/JPY is difficult short-term.
Risk-off sentiment is a short-term negative, too. We stay on the side-lines and wait for signs of a bottoming out.

The technical picture of EUR/USD deteriorated after the break below the key 1.2662 support level (Nov 2012 low). We have a LT negative bias on EUR/USD, but recently, we were a bit surprised by the fast pace of the EUR/USD decline. The trend is intact, but the price action last week and yesterday, suggests that the market was too long USD. It might take time for the pair to work through oversold conditions. The 1.2043/1.1877 support is the next LT target.
Yesterday’s break above 1.2791 is an additional sign of short-term USD weakness. A re-break above 1.2995 would be really significant and suggest a real loss of momentum in the longstanding EUR/USD downtrend. This is not our preferred scenario, but in this high-volatile environment, caution is warranted.

EUR/GBP returns north of 0.80

Contrary to the inflation data on Tuesday, the UK labour market report had no clear message for sterling trading and was unable to kick-start a directional move of sterling. Later in the session, the focus turned to the dollar. The dollar was sold aggressively after poor US eco data. In this move EUR/USD again outperformed cable, pushing EUR/GBP to a new short-term reaction high north of 0.8000.

Today, there are no important eco data on the calendar in the UK. Of late sentiment on sterling was already fragile and this week’s UK data confirmed the sterling negative sentiment. A rebound in EUR/USD also pushed EUR/GBP higher of late. If the EUR/USD rebound peters out, this could cap the topside in EUR/GBP, too. For now, this hypothesis still needs confirmation.

Strategy. Of late, we indicated that it might be difficult for EUR/GBP to break the key 0.7755 support. After the rebound of sterling and the soft comments from the BoE (minutes), investors are pondering the chances for further sterling gains. The focus for sterling trading should now return to the economic fundamentals and to the guidance from the BoE on policy normalization. We look for a more pronounced uptick to reconsider EUR/GBP shorts. However, for now we are in no hurry as sterling momentum stays fragile. The breach above 0.79 is a further short-term negative for sterling.