EUR/USD drifts slightly lower

On Friday, the main FX crosses had a quiet, unspectacular sideways oriented session in which the dollar ultimately closed with some minor gains against euro, yen and sterling. Risk sentiment wasn’t too bad and at times supported the dollar. The US eco data were mixed. The JOLT labour data disappointed a bit, while the production and especially Michigan consumer confidence were stronger. EUR/USD traded in the 1.14 to 1.1340 range. As the last move of US equities was sharply up, EUR/USD ended the session near the lower boundary of the intra-day range at 1.1349, down from 1.1384 on Thursday. USD/JPY held initially close to the 119 level, but got some momentum in the US afternoon trading, closing at 119.44 (up from 118.90 previous close).

Overnight, the dollar trades slightly weaker against euro (1.1368) and against yen (119.29). Risk sentiment turned slightly negative overnight and most equity indices now show modest to moderate losses. The Chinese figures were mixed. Chinese Sept. retail sales were marginally stronger while industrial production and investment were a lot weaker than expected. Q3 GDP was a tad higher than expected at 6.9% Y/Y (but Q/Q stable and as expected at 1.8%; still the slowest growth rate since Q1 2009). GDP details showed weakness in exports and manufacturing and strength in consumption and services. These figures are widely contested. European and US equity markets are at or near key resistance, which suggests that some profit taking may occur after a test.

Regarding trading, the US calendar is light today and in fact the whole week.
Today, the NAHB homebuilders’ sentiment is expected to have stabilized at a high level (62). More house data include starts & permits on Tuesday and Existing Home sales on Thursday. These are quite volatile on a month-to-month basis and unlikely to give the dollar firm guidance. For the sake of completeness, the initial claims will be released on Thursday and the Markit manufacturing PMI on Friday. So, eco data are nothing to get excited about. Similarly, there are 5 public appearances by Fed members scheduled, but none deals treats monetary policy or the economy and thus it doesn’t look promising in terms of FX market movements. The US earnings season is now in full swing, but markets seem in good mood, also as the bar to meet the consensus is low. Nevertheless risk sentiment may be a key driver for the dollar ahead of the ECB meeting.

The EMU calendar is more enticing with the ECB meeting on Thursday. We don’t expect the ECB to take yet additional measures, but Mr. Draghi may lay the groundwork for such extra loosening. (KBC flash follows on Tuesday). So, any upside for EUR/USD should be limited this week. The other main event is the release on Friday of the PMI business confidence surveys. A very modest deterioration is expected.

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 made the dollar vulnerable short term, but in absence of US eco data this week, attention may turn to the ECB which may send a dovish message at its meeting on Thursday.
The 1.1460/95 resistance was extensively tested, but the test was rejected. For today, we see mainly sideways trading, driven by the eventual gyrations of the equity markets, even if the relationship between equities and EUR/USD loosened. The jury is still out, but the topside in EUR/USD is better protected.
The dollar may try to make some come-back ahead of the ECB meeting. In this respect EUR/USD support stands at 1.11. In a longer term perspective, if the policy divergence between the Fed and the ECB becomes less outspoken, EUR/USD may return toward the August correction high at 1.1719.

Will sterling dip below 0.733 resistance on ECB?

On Friday, Sterling traders endured an uninspiring trading session that ended mixed for sterling. Slight gains versus euro and minor losses versus dollar.
Trading in EUR/GBP and cable was at the mercy of global market moves in the dollar and the euro. The euro felt some slightly follow-through selling in the wake of Thursday’s setback. EUR/GBP traded with a slight negative bias in the morning, but soon settled close to the 0.7350 level, where it closed, down from 0.7363 on Thursday. Cable hovered also in a tight range near 1.5450 and closed at 1.5438, down from 1.5460 on Thursday. Both cross rates didn’t go anywhere.

Regarding the market calendar this week, only the retail sales on Thursday have market moving potential. Important might be a testimony and a speech of BoE Carney on Tuesday/Wednesday. According to the FT, the government mandated former MPC member Branchflower to lead a review of the BoE mandate. Are other objectives than inflation needed to include? Should the target be higher or lower? Very important questions that may in time move UK yields and sterling.

Earlier tonight, Rightmove house prices were up 0.6% M/M and 5.6% Y/Y, down from 6.4% Y/Y in September. It won’t have a lasting impact though. This emptied today’s UK eco calendar. Sterling temporarily weakened but EUR/GBP (0.7358), trades again close to Friday’s levels. 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 (EUR/GBP 0.7483/0.75 strong resistance) looks better protected, but will a dovish ECB help to extend the recent sterling 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 former (resistance) was extensively tested last week. Sustained trading north of 0.7483 would deteriorate the ST sterling picture, but a drop below 0.7333 paints a sterling bullish double top on the charts, which may see EUR/GBP extend towards 0.72 (tough resistance for sterling). Will a soft ECB meeting help sterling regain ground? That’s our bias at the start of the week.

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