EUR/GBP only slightly lower on strong UK eco data

EUR/USD ignores divergent news flow

Yesterday, the eco calendar on both sides of the Atlantic brought several surprises. The EMU PMI was a big disappointment as it indicated a further slowdown of the EMU recovery. On the other side of the Atlantic, the US CPI was marginally higher than expected and the Philly Fed even went through the roof. This combination of data triggered quite some intraday swings in (especially longer dated) bonds and in equities. The reaction of EUR/USD was again muted. The pair basically still drifted sideways in the 1.25 big figure and closed the session hardly changed at 1.2539 (from 1.2554). The USD/JPY rally took a breather, too. The pair touched a correction top just below 119 in the run-up to the opening of European markets but settled in the 118 area during the US trading hours. Strong US eco data again didn’t inspire further USD gains. It has occurred several times of late that the dollar failed to profit from strong US eco data, especially against the euro. The indecisive tone from Wednesday’s Fed minutes probably didn’t help to change this lacklustre USD performance.

Overnight, sentiment on risk in Asia turned positive. Good US eco data and constructive price action on the US equity markets yesterday evening support Asian equities. The PBOC injecting short-term funds might have been a positive too. This time, the constructive equity sentiment didn’t trigger any USD/JPY gains anymore. On the contrary, yesterday’s USD/JPY correction continues.
Simple profit taking after the recent astonishing rally is part of the explanation. The scaling back of yen shorts was reinforced by comments from Japanese Fin Min Aso as he said that the fall of the yen went too fast. USD/JPY dropped below 117.50 this morning, but tries to fight back. In this context, EUR/USD remains an area of remarkable calm. The pair is still hovering in the 1.2550 area.

Today, there are no important eco data on the agenda in Europe and in the US. The ECB can start ABS buying today. However, this won’t be a game changer for EUR/USD trading. Currency trading will be driven by technical considerations and by the swings in equities. Recently, the dollar failed to book any meaningful gains against the euro. From time to time, one even has the impression that the short-term EUR/USD momentum might tilt to the upside even as the data flow points decisively in the other direction. We don’t change our LT EUR/USD negative bias but wait for a clear sign of a change in momentum to add EUR/USD short exposure. The dollar needs interest rate support at the short end of the curve to make any further progress against the euro. This doesn’t happen right now. The currency markets apparently want clear signs that the Fed is preparing further steps of policy normalisation as the economy improves or that ECB bond buying is around the corner. This isn’t the case now and leaves EUR/USD in a limbo short-term.

USD/JPY spiked sharply higher after the BoJ policy decision and reached the highest level in 7-years. Technically there is no big hurdle anymore till the psychological 120 mark and the major LT 2007 top (124.11). These levels are far away, but USD/JPY might still have some way to go, both due to yen weakness and further USD strength. We have a LT USD/JPY positive bias. This week’s price action suggests that the downside in this cross rate is well protected as long as sentiment on risk remains constructive. For now yesterday’s move is nothing more than healthy correction.

EUR/GBP only slightly lower on strong UK eco data

The reaction function of EUR/GBP is still a bit similar to the headline EUR/USD combination. The euro declined temporary on the poor EMU PMI’s. The news flow from the UK was (very) strong with good October retail sales and and decent CBI orders. EUR/GBP is off the recent highs and dipped temporary to the 0.7875 area. Even so at the end of the day, the decline of EUR/GBP was limited (0.7990), given the data strength. Cable is off the recent low but the picture still looks fragile.

Today, the UK public finance data are on the agenda. The report will probably be only of intraday significance for sterling trading, at best. With the global calendar almost empty, too, technical order-driven trade can be expected.

Earlier this week, we considered the rebound of sterling after the BoE minutes as slightly disappointing. This assessment remains in place after yesterday’s UK eco data. Even so, we have the impression that a top/tough resistance is building in EUR/GBP data. Has the EUR/GBP rally run its course? A cautious sell-on upticks can be reconsidered.