EUR/USD and USD/JPY hold tight ranges

Yesterday, currency traders experienced a dull trading session. Trading in the major USD cross rates was confined to tight ranges. US market were closed in observance of the Thanksgiving holiday. The EMU lending data were OK, but didn’t change market expectations for additional ECB easing next week. European yields and the euro held near the recent lows. EUR/USD traded in a tight range just above the 1.06 big figure and closed the session at 1.0610 (from 1.0624 on Wednesday). USD/JPY hardly profited from positive equity sentiment in Europe. The pair ended the session at 122.57 (from 122.74).

Overnight, Asian equities are mostly trading in the red. China underperforms. Japanese data were mixed. The unemployment rate dropped unexpectedly from to 3.1% from 3.4%. Household spending disappointed again. CPI data were close to expectations. The National core CPI (ex fresh food and energy) was unchanged at 1.2%. As usual, the data had hardly any impact on yen trading. The news flow from China is negative. Industrial profits declined more than expected (-4.6% Y/Y). Several brokerages are subject to regulatory probes and at least two bond issuers signal difficulties to meet their payment obligations. Chinese equities (losses off around 5%) and the yuan (USD/CNY 6.3950 currently) are trading in the red. The impact of the tensions in Asia on the major USD cross rates is modest. USD/JPY loses a few ticks in the 122.40 area. EUR/USD holds within yesterday’s trading range in the 1.0620 area.

Today, the calendar is again rather thin. There are no important eco data in the US. In the EMU, the EC’s confidence indicators will be published. Of late, European confidence data often surprised on the upside. Such a scenario is also possible for the EC confidence data. At the same time, better than expected EMU eco data were largely ignored recently. Markets assume that the ECB will add substantial monetary easing at next week’s policy meeting, ‘whatever the data’. The expectation for aggressive monetary easing keeps the euro near the recent lows. We don’t expect the markets’ assessment on (good) EMU data to change today. In a day-to-day perspective, we look out whether there are any negative spill-over effects from the risk-off in China on US and European markets. If so, it might trigger a limited rebound in the euro against the dollar as the single currency is still the preferred carry funding currency. However, of late; the upside of the euro proved well capped ahead of the ECB meeting, even in case of global risk-off sentiment. In this scenario USD/JPY might lose some further ground today.

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.

Risk-off sentiment to weigh on sterling?

On Thursday, the UK currency failed to build on Wednesday’s positive momentum. There was little sterling specific news. Trading in the UK currency was technical in nature. Sterling partially reversed Wednesday’s rebound. Cable came close to the key 1.5060 support area intraday, but the test was again rejected. The pair closed the day at 1.5102. EUR/GBP rebounded to the 0.7040/45 area, but closed off the intraday highs at 0.7026 (from 0.7022).

Overnight, the UK GFK consumer confidence was slight below the consensus at 1 (versus 2 expected). Sterling is losing ground against the euro and the dollar this morning, but this probably due to the global risk-off sentiment.

Later today, the details of the UK Q3 GDP will be published. Markets will keep an eye at the contribution of private consumption and of net exports. Negative surprises in those components might be a slightly negative for sterling. However, we expect the reaction of sterling to the data to stay limited. Global sentiment on risk might be more important for sterling trading. Sterling might come under pressure again in case of substantial negative spill-over effects from China on European equities. In that case, a scenario similar to Tuesday might be on the cards.

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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