Dollar ceding further ground on poor US data

On Wednesday, the dollar stayed under pressure. Global sentiment on risk softened and the US data (retail sales and PPI) disappointed, making a 2015 Fed rate hike less likely. The dollar paid the price. USD/JPY closed the session at 118.83 (from 119.75). EUR/USD ended the session at 1.1474 (from 1.1379). So, the 1.1460 resistance is under heavy strain. The Fed Beige book had a slightly soft bias, putting additional pressure on the US currency.

Overnight, Asian equities opened mixed, but sentiment on risk improved gradually later in the session. Markets apparently adjust positions for a scenario of the Fed keeping interest rates lower for longer. This scenario will keep global monetary conditions easy too, supporting a risk-on trade, at least short-term. USD/JPY tries to regain the 119 level. This time, the risk on rally doesn’t help the dollar against the euro as the focus is on an easier than expected Fed policy going forward. EUR/USD trades in the 1.1480 area. The dollar is also losing ground against the likes of the Kiwi dollar and the Aussie dollar. The Australian September labour data were slightly softer than expected, but didn’t really hurt the Aussie dollar. USD weakness prevailed. AUD/USD is holding north of 0.73.

Today, there are no important data in Europe. We look out for comments from ECB members attending a conference in Warsaw. Will they pick up recent developments? Nowotny is not really a dove. So, if he turns more dovish on ECB policy, that would be an interesting signal. In the US, the calendar is very interesting with the jobless claims, the Empire manufacturing survey and the Philly Business outlook and, last but not least the CPI. Regarding the activity indicators, the Empire survey and the Philly Fed survey are expected to improve after a recent setback. The headline CPI is expected to fall back into negative territory from 0.2% Y/Y to -0.1% Y/Y. Core inflation is expected stable at 1.8% Y/Y. We don’t have strong arguments to take a different view from the consensus for the CPI, but if US data would again surprise on the downside, there will be additional damage for the dollar as it would further diminish the chances for a Fed rate hike in the near future. Later in the session, several Fed members including Bullard, Dudley and Mester will speak.

Global markets struggle to assess the health of the global economy and its impact on monetary policy. In a short-term perspective, markets are focused on the impact of weaker US data on the Fed rate hike path. This makes the dollar vulnerable short term even as the ECB might also ease policy further if economic conditions deteriorate further. However, potential ECB action is probably some way off. So, the short-term context is USD negative; EUR/USD is currently breaking above the 1.1460 resistance. Technically this is a further USD negative. Both in bonds and in the dollar quite some bad news should already be discounted. Even so, we don’t row against the tide untill there is a clear sign that EUR/USD rebound has run its course (e.g; the ECB stepping up its easing rhetoric). Delayed Fed rate hike expectations also weigh on USD/JPY even as equities hold up well.

In a long term perspective, EUR/USD and USD/JPY might see more range trading. A Fed rate hike will likely be delayed, but such a scenario also raises the chances for more ECB or BOJ easing. In this context, one doesn’t expect a protracted downtrend of the dollar against the euro. If the policy divergence between the Fed and the ECB becomes less obvious, EUR/USD may return toward the August correction high at 1.1719.

Test of EUR/GBP 0.7383 resistance rejected

On Wednesday, the UK labour report painted a mixed picture. The unemployment rate declined from 5.5% to 5.4 % and the number of new people employed rose by 140.000. On the other hand, wage growth rose at a slower than expected pace. Sterling regained some ground against the euro and the dollar. The move was probably also a reversal in the wake of Tuesday’s post-CPI losses. EUR/GBP dropped from the 0.7460 area to the low 0.74 area. Cable was already trending higher in the run-up to the labour data due to overall USD weakness. The rebound accelerated after the labour report and was reinforced by poor US data. Cable closed the session at 1.5477 (from 1.5248!).EUR/GBP closed the session at 0.7413 from 0.7462.

Today, there are no important eco data in the UK. So we look out whether sterling will be able to maintain yesterday’s gains. If so, it might be an indication that the recent correction has run its course. Yesterday’s price action also indicated that the 0.7483/93 area is a strong resistance.

From a technical point of view, EUR/GBP still trades in the upper part of the sideways range capped by 0.748/933. The latter was extensively tested earlier this week. Sustained trading north of 0.7483 would deteriorate the short-term picture of sterling. This is not our preferred scenario. Even so, partial stop-loss protection on EUR/GBP shorts is warranted.

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