Euro rebound easily reversed

Yesterday, the dollar regained most of Tuesday’s losses as tensions between Russia and Turkey were expected not to escalate. Rumours on (aggressive) measures at next week’s ECB meeting pushed European yields lower, supported European equities and weighed on the euro. The euro decline/dollar rebound slowed later in the session as US equities drifted basically sideways. EUR/USD closed the session at 1.0624 from 1.0643. USD/JPY ended the session at 122.74 from 122.53. The trade-weighted dollar traded briefly north of 100, but the cycle top at 100.39 just wasn’t reached.

Overnight, Asian equities trade mostly with modest gains. China underperforms. Some industrial commodities including oil show tentative signs that the recent decline is slowing. This is supporting equities. Even so, despite a better commodity sentiment, the Aussie dollar slightly underperforms this morning. The positive impact from commodities on the Aussie dollar is counterbalanced by a sharp decline in private capital expenditure in Q3 (-9.2%). AUD/USD is slightly off yesterday’s correction top and trades near 0.7235. EUR/USD is little changed from yesterday’s closing level and trades near 1.0620. USD/JPY loses slightly ground in the 122.55 area.

Today, the calendar is thin. The EMU money supply and lending data and, to a lesser extent, the Gfk consumer confidence have (modest) market moving potential. The EMU money supply/lending data are in theory interesting input for the ECB policy meeting. However, the currency market seldom reacts. A poor figure might be slightly negative for the euro as it could fuel market speculation on aggressive ECB measures next week. US markets are closed in observance of Thanksgiving. So trading on global markets will develop in thin conditions.

Yesterday, euro weakness due to speculation on aggressive ECB easing next week, was the main drive for currency trading. At the same time, the dollar was better bid as markets assumed no escalation in the Russia/Turkey tensions. Those factors should be largely worked out. So, some consolidation in the major USD cross rates might be on the cards. Yesterday’s price action suggests that the topside in the euro is well protected going into the next week’s ECB policy decision. Euro weakness prevails. The dollar is apparently in more neutral territory as markets contemplate what a gradual rate hike cycle might mean, once the Fed lift-off occurred.

From a technical point of view, EUR/USD dropped below the 1.0809 support and reached the targets of the short-term multiple top formation in the low 1.0715 area. With policy divergence between the Fed and the ECB still in place, we don’t row against the EUR/USD downtrend, but 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 came on the radar, but a test looks difficult short-term.

Sterling rebounds after Tuesday’s setback

On Wednesday, sterling reversed Tuesday’s losses against the euro.
Speculation on aggressive monetary easing at next week’s ECB meeting hammered European bond yields and weighed on the single currency. At the same time, the dollar was in better shape. Cable retested Tuesday’s low in the 1.5060 area, but the test was rejected. The pair even reversed the early losses and closed the day in positive territory. A constructive assessment on the UK economy in the mid-year Government bud-year review maybe was a slightly positive for sterling. Cable ended the session at 1.5129 from 1.5084 on Tuesday. EUR/GBP reversed Tuesdays gains the pair ended the day at 0.7022 (from 0.7056).

Today, there are no important data on the calendar in the UK. With US markets closed for the Thanksgiving Holiday, trading in the major sterling cross rates might also develop in thin market conditions. Yesterday’s price action suggests that short-term sentiment on sterling isn’t that bad. Cable also showed some tentative signs of the downside being better protected. For EUR/GBP, we assume that the correction won’t go very far with the ECB meeting looming in the horizon.

Looking at the broader picture, the soft ECB stance pushed EUR/GBP lower in the longstanding sideways range. The pair cleared the 0.7196 support after the October FOMC meeting. 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 prevails. Next key support is this year’s low at 0.6936. The correction low at 0.6982 has become an interim support.

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