EUR/USD falling of a cliff ahead of ECB QE purchases

On Thursday; the dollar outperformed and, even more, the euro was heavily sold. Bond markets were the driver. European bond yields nosedived, probably as investors anticipated on the start of ECB QE. At the same time, the dollar got, albeit limited, interest rate support as US inflation data were OK. The combination of both pushed EUR/USD off a cliff. The swings in USD/JPY were much more moderate. The pair cautiously regained the 119 big figure.

Overnight, Asian equities trade again mixed. China outperforms. Investors anticipate more easing to support the slowing economy. A sharp decline of the yuan is helping, too. The PBOC set the USD/CNY fixing almost 100 pips higher due to the USD rally. The yuan trades at the lowest level against the dollar in more than two years. Japanese equities are little changed. Japanese eco data including production, retail trade and, to a lesser extent CPI, were mostly on the weaker side of expectations. USD/JPY rebounded to the mid 119 area on overall dollar strength late in the US, but the gains couldn’t be sustained this morning. USD/JPY is back in the low 119 area, little changed from where it was this time yesterday. EUR/USD continues to struggle, trading in the low 1.12 area.

Today, the German February CPI data will be published. An unchanged -0.5% Y/Y is expected. A higher than expected figure might be slightly euro supportive. However, the reaction should be guarded as ECB QE will start anyway. In the US, the first revision of Q4 GDP, the Chicago PMI and the final Michigan consumer confidence will be released. Markets will look out whether negative surprises can be avoided after several disappointing US data of late. In case of decent US data, the dollar can maintain its bid, especially against the euro. Last but not least, several Fed governors (Fischer, Mester and Dudley) will speak on monetary policy. Fischer and Dudley have a middle-of-the road position in the Fed. If they turn slightly more hawkish, it might be USD supportive, too.
To summarize: yesterday’s EUR/USD decline was mostly a repositioning ahead of the start of ECB QE. This process remains in play and should cap the topside of the euro. After some mixed signals of late, the balance yesterday tilted again towards higher US bond yields and a stronger dollar. In case of decent US eco data this process can (gradually) continue. If the rise of the dollar starts weighing on USD equities, the topside in USD/JPY could become less evident. So, USD/EUR is still preferred to trade USD strength rather than USD/JPY. Of course, the decline of EUR/USD probably won’t proceed at yesterday’s pace.

From a technical point of view, 1.1534 (reaction high)/1.1679 (reaction top) remains our first topside reference. We still assume a sustained break will be difficult. On the downside, first important support at 1.1262/24 was broken yesterday. This brings the 1.1098 (correction low) on the radar. For a sustained break of these levels, a substantial rise in US bond yields is probably needed. Recently, US data were not strong enough to initiate a new USD up-leg. The payrolls are the next high profile US data. The dollar can stay well bid against a weak euro short-term, but we think that confirmation from strong Payrolls is needed to start a real new USD upleg beyond the cycle low in EUR/USD. We maintain a EUR/USD sell-on-upticks approach but still hope for a temporary rebound to add EUR/USD short exposure. Or will the pressure from QE be that strong? USD/JPY tried to regain the 120 barrier after the previous US payrolls, but the key 120.83/121.85 resistance stayed out of reach. The yen rebounded on rumours that Japanese policy makers debate the need for further easing/yen weakness. The pair holds well within the 115.57/121.85 trading range. A sell-on-upticks approach within this range is slightly preferred.

EUR/GBP hammered as euro stumbles

On Thursday, sterling showed again a mixed picture. The UK currency gained further ground against the euro, which was heavily sold across the board as European yields declined and markets positioned for the start of ECB purchases. At the same time, cable ceded ground as the dollar outperformed.

This morning, GfK consumer confidence was reported stable at 1. A slight rise to 2 was expected. Even so, sterling remains well bid with EUR/GBP is still testing the cycle lows in the 0.7260 area.

Later today, there are only second tier data on the agenda. We have a longstanding EUR/GBP negative bias, but didn’t expect the down move to go that fast short-term. There is no reason to row against the tide, but a breather still looks likely in near future.