Dollar shows limited gains as sentiment turns risk-on

Yesterday, the risk-on rally continued, pushing European equities sharply higher. However, core bonds lost only slightly ground. In the same vein, the gains of the dollar against the euro and yen were modest. EUR/USD closed the session at 1.1177 (from 1.1249). USD/JPY ended the session at 119.88 , only marginally higher from Tuesday (119.74).

This morning, official China PMI’s were little changed. The Caixin composite PMI declined further from 48.8 to 48.00 due to a decline in the services measure. In Japan, the Tankan Large manufacturing index declined more than expected, but the measures for the non-manufacturing sector and for small business were mostly better than expected as was Capex. Despite mixed confidence data in China and Japan, the reaction of Asian equities is constructive. So, it looks like the risk-on rebound has further to go. Even so, the gains in USD/JPY remain very modestly. USD/JPY is changing hands in the 120.25 area. The dollar gains some further ground against the euro, with EUR/USD trading in the 1.1150 area. The AUD/USD is trending higher in the 0.70 big figure, as commodities rebound.

Today, the focus will be on the manufacturing PMI/ISM. In Europe, the preliminary manufacturing PMI declined to 52.00, mostly due to Germany.
While a slight downward revision is possible, it won’t be a major issue for EUR/USD trading. The US manufacturing ISM has more market moving potential. A further setback from 51.1 to 50.6 is expected. Regional confidence data were poor of late. So, we are neutral on the outcome of the ISM. The market reaction in Asia this morning suggests that, after the recent sell-off, equities are again more inclined to react positively if the data allow to do so. In such context, the dollar might remain well bid. In a day-to day perspective, USD/JPY and EUR/USD are blocked in very tight ranges. In EUR/USD, the recent lows in the 1.1105/1.1087 area are the first support levels. It won’t be that easy to break this area before the payrolls.

In a broader perspective, the global picture for the dollar (EUR/USD) hasn’t changed. The dollar rebound ran into resistance at the end of last week, but for now EUR/USD is holding the established sideways consolidation pattern.
1.1087/1.1017 looks like a solid bottom for now. 1.1460 is a first interim resistance. 1.1714 is the line in the sand. If the policy divergence between the Fed and the ECB would become less obvious (delay in Fed rate hike expectations), EUR/USD might return toward the topside of this range.

EUR/GBP drifting off the recent highs

Yesterday, there was a slight improvement in sentiment vis-à-vis the UK currency. Easing of global tensions was a positive for the sterling as it was for the dollar. The UK data played a role too. UK Q2 GDP growth was confirmed at 0.7% Q/Q, but the Q2 current account was much smaller than expected. The services index suggested ongoing solid growth at the start of the third quarter. Decent UK eco data combined with a constructive global sentiment triggered a rebound of sterling after a disappointing performance of late. This was in the first place visible in EUR/GBP. The pair closed the session at 0.7388, from 0.7426 on Tuesday. Cable initially rebounded north of 1.52, but a late session rebound pushed the pair back to the low 1.51 area. So, sterling underlying sentiment on sterling remains fragile.

Today, the UK manufacturing PMI is expected to decline further from 51.5 to 51.3. Recent data of the UK manufacturing sector were weak, but UK growth is mostly driven by the services sector. So, the reaction of sterling to today’s report might be limited, unless there is a big deviation from consensus. A positive sentiment on risk might still be negative for the EUR/GBP.

From a technical point of view, EUR/GBP is still trading in the upper part of the trading range which is marked by the 0.7423/0.7483 boundaries. The 0.7423 was extensively tested, but no sustained break occurred. Sustained trading north of 0.7483 would deteriorate the sterling short-term picture, which is not our preferred scenario. Even so, partial stop-loss protection on EUR/GBP shorts can still be considered.

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