Dollar rebounds on ECB talk and better US data

On Thursday, EUR/USD reversed Wednesday’s gains. The move was partly euro weakness triggered by dovish comments of ECB Nowotny. Later in the session, the dollar profited from a higher than expected US CPI & lower than expected initial claims. EUR/USD closed the session at 1.1386, down from 1.1474 on Wednesday. USD/JPY had a volatile session yesterday. The pair was hit by risk-off sentiment early in the session. A sharp decline in EUR/JPY weighed on the headline pair, too. USD/JPY dropped temporary to the 118.07 area, but rebound after the US data releases as equities rebounded. The pair closed the session at 118.90 little changed from 118.83.

Overnight, Asian equities trade mixed. Japan outperforms, but the gains are modest given the rebound yesterday in the US. USD/JPY regained the 119 big figure and trades currently in the 119.15/20 area. The modest risk-on rally in Asia this morning leaves EUR/USD little changed. The pair trades in the 1.1380 area. The recent commodity driven rebound of the Aussie dollar looks like its running into resistance. AUD/USD is drifting back south below the 0.73 mark.
Asian markets are looking forward to Chinese GDP data, scheduled for release Monday morning.

Today, the EMU August trade balance and the final September CPI will be published. The final EMU headline CPI is expected at -0.1% Y/Y, the core CPI at 0.9% Y/Y. A downward revision could be a slightly negative for the euro, especially in the run-up to the ECB policy meeting next week. In the US, the industrial production, JOLTS job openings and consumer confidence from the university of Michigan will be published. We see downside risks for the US production. The consensus expects Michigan consumer confidence to decline from 87.2 to 85.5. for this indicator, we don’t have strong arguments to take a different view from the consensus.

Global markets struggle to assess the health of the global economy and its impact on monetary policy. Of late (currency) markets were 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.

Yesterday’s comments from ECB’s Nowotny to some extent restore to balance of softness and blocked the rebound of EUR/USD. The 1.1460 resistance was extensively tested, but finally the test was rejected. For today, we don’t see a clear signal from the data for USD trading. Will there be some end of week profit taking in equities after yesterday’s remarkable rebound. If so, it might be a slight negative for the dollar. The jury is still out, but after yesterday’s euro setback, the topside in EUR/USD is probably better protected going into next week’s ECB meeting. The 1.1460/1.1495 might be a tough resistance short-term. 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. USD/JPY looks more vulnerable to a delay in the Fed risk-off and/or rising volatility.

Sterling in better shape

On Wednesday, a decent UK labour market report to put a floor for sterling, both against the euro and the dollar. Yesterday, sterling extended its rebound against the euro and preserved most of its gains against the dollar even as there were no important eco data in the UK. During the morning trade, cable held a tight range mostly in the upper half of the 1.54 big figure. The euro made a step backward as ECB Nowotny suggested that the ECB should ease its policy further as it is clearly missing its inflation target.
EUR/GBP declined back below the 0.74 level. Later in the session, cable and EUR/GBP were driven by technical trading and by the swings of the dollar. EUR/GBP went for another down-leg as cable fell less than EUR/USD on the US eco data. EUR/USD trades currently at around 0.7370. Cable trades in the 1.5435 area.

Today, there are again no important eco data in the UK. So sterling trading will again be driven by technical considerations and by the price swings in the major dollar cross rates. The downside in sterling looks now better protected, but we don’t see a trigger right now for an extensions of the recent rebound.
From a technical point of view, EUR/GBP still trades in the upper part of the sideways range capped by 0.7483/0.7333. 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. The topside of EUR/GBP looks better protected.

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