EUR/GBP drifting higher ahead of UK CPI data

Russia crisis to have different impact USD cross rates

On Monday, trading on global markets entered temporary calmer waters. This provided some relief for the dollar, too. However, later in the session risk-off sentiment flared up as a new down-leg of the oil and a subsequent fall of the ruble raised fears for more global uncertainty. The swings in the dollar were moderate after all. USD/JPY returned to the mid 117 area. EUR/USD spiked temporary higher to the 1.2480 area, but closed the session at 1.2437 compared to 1.2462 on Friday evening.

Overnight, the focus remains on oil and even more on Russia. Russia raised interest rates to 17% (from 10.5%), which illustrates that this market entered new phase. This affects in the first place Russia and its currency, but has much broader effects and global (currency) trading. Asian markets are again in risk-off modus. China is still slightly outperforming, even as the HSCB manufacturing PMI declined to 49.5. The yuan declined further as the Chinese central bank set a lower mid-point for the CNY and as markets continue to bet for more stimulus. However, this doesn’t help the global story anymore. Most emerging markets’ currencies are coming under ever greater pressure and also the commodity currencies like the Nok, the Aussie and the Kiwi dollar and the Canadian dollar fight an uphill battle. This risk-off traded favours the yen this morning. USD/JPY and EUR/JPY are extending losses with USD/JPY changing hands in the low 117 area and EUR/JPY testing the 146 barrier. The price swings in EUR/USD remain moderate. Risk-off sentiment and lower core bond yields were a negative for the dollar. At the same time, the Russia crisis might have quite some additional negative impact on Europe and on European assets. So, he story is more neutral for the single currency. We would be a bit surprised to see EUR/USD making sustained gains due to rising tensions in Russia or on other emerging markets. In this respect we also keep a close eye at intra-EMU spreads. Of course, tomorrow’s FOMC decision remains a wild card.

Later today, the EMU preliminary PMI’s will be published. We assume that the impact from most recent developments in Russia is not yet captured by the survey. So, the figure might be better than expected. The decline of the oil price might even be slightly positive. However, the question is whether markets will see an improvement, if any, as sustainable. So, we doubt that a stronger PMI will give a strong boost for the euro.

In the US, the housing starts and building permits will be published. These data series are very volatile. Some intraday volatility around the data is possible, but we don’t expect a big directional move, especially not one day before the Fed.

Strategy. Over the previous days, the decline of the oil price and the risk-off sentiment capped the topside of the dollar. Even in this context, we maintained the view that the 1.25/1.26 area should offer strong resistance for the euro. A ‘Russia/emerging market’ crisis should be negative for the euro, even as the reaction function of EUR/USD is currently highly indecisive. We maintain a cautious sell-on upticks strategy. The risk-off sentiment is putting yen cross rates like USD/JPY and EUR/JPY under pressure. USD/JPY is drifting bellow last week’s low (117.44), deteriorating the technical picture. A similar picture is developing in EUR/JPY. Protection on all yen shorts is warranted.

EUR/GBP drifting higher ahead of UK CPI data

On Monday, the UK data weren’t that bad ,with strong UK CBI orders , but the direct impact on sterling was limited. The overall ‘bid’ for the dollar pushed cable from the mid 1.57 area to the low 1.56 area. In this move, cable clearly underperformed EUR/USD, sending EUR/GBP higher towards the 0.7970 area. We didn’t see much eco news to support the move. M&A deals and rumours from different UK based firms/investment funds probably played a role. Still the technical picture for cable and EUR/GBP hasn’t changed in a profound way.

This morning, cable tries to regain some ground, both against the euro and the dollar. Later today, the focus will be on the UK price data. The headline CPI is expected to decline from 1.3% Y/Y to 1.2% Y/Y. The core is expected stable at 1.5% Y/Y. At first sight, these data will give the BoE more room of manoeuvre with the timing of a first rate hike. In a day-to-day perspective, the data might be slightly negative for sterling. However, we expect tomorrow’s BoE minutes to show a much more balanced assessment than the soft tone from BoE Carney. So, any upticks in EUR/GBP still can be seen as an opportunity to sell.