FX trading: One long yawn

Yesterday. FX trading started the week in slow motion and never found firm direction, even not after the release of key Chinese data (see yesterday’s report). The European eco and event calendars were nearly empty. After a strong start, European equities gradually erased gains, as key resistance played its role (343 for the EuroStoxx 600). Yield changes for both US and German bonds were small. Technical range trading prevailed on FX markets. In a daily perspective, EUR/USD closed at 1.1327, versus 1.1350 on Friday, while USD/JPY ended the session at 119.50, little changed from 119.44 on Friday.

Overnight, trading continues to hang on without momentum. Movements are even smaller than yesterday. EUR/USD is changing hands at 1.1330 and holds in a 15 pips range. Similarly, USD/JPY trades at 119.50, unchanged from yesterday’s close and in an overnight range of …..10 ticks. There were no eco releases and Asian equities trade narrowly mixed.

Today, the eco-calendar remains rather thin, with only US housing data.
September Housing starts are expected at 1142k, an increase of around 1.4% M/M. We don’t distance us from consensus. New building permits are expected to have declined 0.6 M/M to around 1170k. Fed governors Dudley, Powell and Yellen will speak. The former two speak at conference on “The structure of the US Treasury market”. Yellen gives welcoming remarks. We don’t expect market moving comments. So, the focus for currency trading remains on earnings/equities and on the Thursday’s ECB policy meeting. We don’t expect the ECB to take additional measures yet but Mr. Draghi may lay the groundwork for extra easing. In this context, we expect more sideways trading in EUR/USD with the topside being rather well capped going into the ECB policy meeting.

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. However, in absence of key 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. 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. First support for EUR/USD 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. USD/JPY looks more vulnerable to a delay in the Fed rate hike cycle in case of risk-off and/or rising volatility.

Sterling extends cautious rebound

For the fourth consecutive session sterling gained ground. The UK and EMU calendars were empty. There was some loose talk about the turnaround of Nowotny on his dovish comments (from Thursday). In the weekend, he apparently backtracked. We wouldn’t make too much from it. He probably got a nod from Frankfurt that no policy change was scheduled on Thursday in sunny Malta. We think that the sterling gains, exclusively eked out in the European morning trading, were technical in nature. The failed test of the 0.75 level was the sign to take profit and that may still be ongoing. Technically, EUR/GBP fell through the 0.7333 support, potentially painting a sterling bullish double top on the charts. EUR/GBP finally closed at 0.7324, down from 0.7351 on Friday.
Cable did well too and moved to 1.5497 for an intraday high, but traders hadn’t the stamina to go for a real test of the 1.55 handle. Cable eased slightly in the US session to close at 1.5465, up from 1.5438 on Friday.

Today, there are no important eco releases in the UK but BOE governors Carney and Bailey speak at a Treasury Committee while McCafferty speaks in London.
McCafferty’s hawkish view is well known. For Carney, it is not sure that he will give any hints on current monetary policy. So sterling trading will again be driven by technical considerations and by the price swings in the dollar and the euro. The downside in sterling (EUR/GBP 0.7483/0.75 strong resistance) looks better protected. At the same time, a dovish ECB might help to extend the recent decline in EUR/GBP short-term. From a technical point of view. EUR/GBP tries to sustain south of the 0.7330 short-term support. 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). Some further sterling gains against the euro might be on the cards short-term, but we expect the pair to maintain the established ranges.

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