Cable to drop further? EUR/GBP key support to hold?

The dollar is King

Last week’s trading pattern in EUR/USD was one of uninterrupted euro selling. It continued Friday. After a courageous attempt to regain some ground in the Asian overnight session, EUR/USD turned South again from the start of European trading. Eco data didn’t play a role. In the US session, Fed comments were balanced with a hawkish Richmond Fed Lacker (June rate hike) and a dovish Minneapolis Fed Kocherlakota (2016 rate hike). EUR/USD nevertheless fell from an intraday high around 1.0680 to an intraday low at 1.0567. As trading activity decelerated, EUR/USD slid in a sideways trading mode and eventually closed just above 1.06, a 60 ticks daily loss. The break of EUR/USD through 1.0712 makes the short term picture dollar again bullish with 1.0463 (cycle low) and 103.71 (target double top) next support levels. Surprisingly, the yen bucked the trend on Friday despite positive equity market sentiment. USD/JPY closed at 120.22 from 120.58 on Thursday evening. The dollar was undeniable King last week and the Finex dollar (trade weighed) rose from 96.50 to 99.33 in 5 sessions, approaching the 100.39 high.

Today,the eco calendar is thin

Overnight, Asian equities trade mostly positive with Chinese equities sharply outperforming and Japanese equities slightly down. The dollar is well bid and advances against the majors, especially versus sterling. US Treasuries are marginally higher. So, at the very start of a new trading week, last week’s trading pattern continues.

The eco calendar remains thin with only some second tier national production data in the euro area (Italian production). The US calendar is completely empty. The details of the ECB’s weekly asset buying will be interesting.

Later this week, the calendar heats up with the US retail sales, some regional business confidence, Michigan consumer confidence, housing data and CPI. The US earnings season starts in earnest on Tuesday, a number of Fed governors speak and the Beige book will be released. In the euro area, attention goes to the ECB meeting, exceptionally on Wednesday. No new decisions are expected, but Draghi should remain dovish and insist on a full implementation of the asset purchase programme. Finally, the IMF and World Bank hold their Spring meetings with the publication of their outlook on Tuesday and a lot of discussion later in the week. The weak long term growth forecasts (secular stagnation) will get a lot of attention.

In these circumstances we have no strong view on today’s trading (no new incentives), but later this week the dollar may be favoured again if the eco data show an improvement. Furthermore, Draghi should be downbeat in his comments to avoid speculation on a premature tapering of its asset purchase programme. The danger for the dollar may come from the earnings season, if many companies would complain of USD strength and from Fed governors who may try to slow the dollar’s advance. The overweight of euro shorts is another factor to take into account from a tactical point of view. We confirm our long term and short term bullish outlook for the dollar (against euro). EUR/USD may go for a test lower (1.0463 and 103.71), but given the outspoken short position of the euro we still prefer a sell-on-upticks of EUR/USD, preferable near 1.0712 or 1.1098. For USD/JPY, we are more neutral and expect further trading in a sideways band. The BOJ indicated in its Minutes (released overnight) that they don’t envisage to do more (they upgraded assessment of 3 regions and held constant assessment of the other 6 regions) as they are still confident their policy will ultimately raise inflation.

Sterling still struggling with EUR/GBP 0.7222 holding

On Friday, sterling wasn’t strong enough to advance against a weak euro. So, the EUR/GBP 0.7222 support held, while cable fell pretty sharply setting a new cycle low at 1.4587. If the break below GBP/USD 1.4635 is confirmed, this would be a technically important move. Cable followed the fate of EUR/USD, which was again sinking lower in a steady fashion.

Cable to drop further? EUR/GBP key support to hold?

The UK calendar is empty today, but contains CPI & PPI data on Tuesday and the labour data on Friday. So a pretty thin calendar. Also in EMU, the calendar is uneventful today and quite thin further out. Of course the ECB meeting on Wednesday may be important. Ahead of the UK elections we take a wait-and-see stance, while keeping a bullish long term view. Currently the pair is struggling with key EUR/GBP support at 0.7222. We don’t anticipate a break, even as the euro is very weak. However, we see recently more action in cable that tested Friday the cycle low at 1.4635 and overnight tries to break it. Dollar strength combined with UK election jitters make sterling a bit vulnerable short term. Some sterling support may come from the near oversold character of cable.

A sell on up-ticks in EUR/GBP close to 0.74 is our preferred tactic. A break below 0.7222 opens the way to the cycle lows where (rebound) reaction should occur. The long term sterling bull run still stands.