EUR/GBP holding near the 0.70 level

Has USD discounted a December rate hike?

On Wednesday, several Fed speakers talked in favour of a December rate hike, but it didn’t help the dollar much. The Fed Minutes brought a similar message and US equities had another strong session. However, it coudln’t help the dollar much, probably as the Fed reiterated that the rate hike cycle after the December lift-off will be gradual. EUR/USD closed that session at 1.0660 from 1.0642. USD/JPY ended the day at 123.64 from 123.45.

Overnight, most Asian equities join the rebound from the US yesterday evening. The gains are significant (around 1%), but still slightly disappointing given the strong rally in the US. The BOJ as expected left its policy unchanged even as the Japanese economy slipped back into recession in the third quarter. The bank talked slightly softer on inflation, but it wasn’t enough to change the Bank’s policy assessment. Japanese exports (-2.1% Y/Y) and imports (-13.4% Y/Y) were rather poor. Department store sales were fairly strong. USD/JPY slipped off yesterday’s highs this morning. The pair dropped from the 123.60 area and currently trades in the 123.25 area. However, this move is probably in the first place USD weakness rather than JPY strength. The dollar is also under moderate pressure against the euro. EUR/USD tries to regain the 1.07 mark.

Later today, there are again only second tier eco data in Europe. In the US, the jobless claims and the Philly Fed Business outlook have some more market moving potential. However, they are no game changers. This morning, ECB Coeure, Weidmann and Praet speak. Coeure and especially Praet are supporters of an aggressive easing. Weidman is no supporter of QE, but we have the impression that his view has no big impact within the ECB. We also keep a close eye on the ECB account (minutes) of the Oct 22 policy meeting. We especially look out how much support there is for an aggressive deposit rate cut. If this is the case, it would be a negative for the euro. Later in the session, Fed’s Fisher and Lockhart speak. Regarding the Fed, we assume that markets have discounted a December rate hike. The focus turns to the pace of tightening further down the road. For now , the Fed indicates that this process will be very gradual and markets are keen to embrace this scenario.

In a day-to-day perspective, we have the impression that enough good interest rate news is discounted for the dollar. At the same time, anticipation on aggressive ECB easing will remain a negative for the euro (cf supra ECB minutes). A slowdown/ST consolidation of the USD rally might be on the cards. Even so, we expect any USD correction to remain limited/short-lived ahead of the ECB and the Fed December policy decisions. The 1.0809/30 area is first resistance in case of a short-term correction move.

In a broader perspective, short term interest rate differentials widened in favour of the dollar. EUR/USD dropped below the 1.0809 support and reached the targets of the short-term multiple top formation (neckline 1.1087/1.1105) in the low 1.0715 rea. With policy divergence between the Fed and the ECB still in place, we don’t row against the USD uptrend. However, quite some news (interest rate) is already discounted. So, the pace of the USD rally may slow. The post ECB QE lows in EUR/USD (1.0521/1.0458 area) are obvious targets on the charts. We maintain a EUR/USD sell-on upticks strategy for a retest of the cycle lows. For USD/JPY, the cycle tops in the 125.28/86 area are coming on the radar, but a test/break looks difficult short-term.

EUR/GBP holding near the 0.70 level

Yesterday, there were no eco data in the UK. BoE Broadbent warned that investors shouldn’t focus too much on the BoE’s inflation forecasts to make an assessment on the timing of a first BoE rate hike. Instead they should keep an eye at broader factors such as growth. He also said that the yield curves are currently very flat, leaving the timing of the implied first rate hike vulnerable to sudden moves. These comments were slightly hawkish. Cable spiked temporary to the mid 1.52 area, but returned part of the gains later in the session. The pair closed the session at 1.5237 (from 1.5213). The Broadbent comments also triggered some temporary ‘nervousness’ in EUR/GBP. Even so, the pair held a tight sideways range in the lower 0.70 area and even closed the session at 0.6996 almost unchanged from the previous session.

Overnight, USD ‘weakness’ is supporting sterling more than the euro. Cable rebounded to the high 1.52 area. EUR/GBP holds near 0.70. Later today, the UK retail sales and the CBI trend orders will be published. Retails sales are expected to decline after spectacular growth in September. Retail sales are expected to decline 0.5% M/M to be up 4.5% Y/Y. CBI orders are expected to improve from -18 to -10. Of late, the reaction of sterling to UK eco data was often modest as the BoE is in wait-and-see modus on the timing of a first rate. It is far from sure that today’s data will change this. This morning’s price action suggests that cable might outperform EUR/USD in case of a USD correction. This should keep the topside in EUR/GBP well protected.

Looking at the broader picture, the soft stance of the ECB pushed EUR/GBP again lower in the longstanding sideways range. The pair tested the 0.7196 support and the level was ‘really’ broken after the FOMC announcement. A retest occurred after a soft BoE inflation report, but the test was rejected. We maintain a sell-on-upticks approach for EUR/GBP as euro weakness prevail.

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