EUR/USD holding near the recent lows

On Friday, the price pattern of the previous days continued. The euro gained temporary from a risk‐off context in China. However, European yields held near the recent lows and European equities performed reasonably well. Euro selling ahead of the ECB decision remained the preferred ‘by default strategy’. The dollar also held up reasonably well. EUR/USD closed the week at 1.0593 (vs 1.0610 on Thursday). USD/JPY ended the session 122.80 (from 1.2257).

This morning, Asian markets are still in risk‐off. Investigations in the Chinese Brokerage sector are causing some additional volatility. Sentiment on commodities remains fragile. Japanese eco data were mixed. Construction orders and industrial production were weak. Retail sales were OK. The impact on the yen was again limited. Commodity currencies like the Aussie dollar are under slight pressure, but near AUD/USD 0.72, the losses are contained. For now, the risk‐off sentiment doesn’t really help the yen. USD/JPY is little changed in the 122.75 area. EUR/USD is holding within reach of the recent lows in the 1.0585 area. Later today, the IMF will decide on the incorporation of the yuan in the IMF SDR. The IMF staff recently gave a positive advices. So, a positive decision is highly likely. We don’t expect any direct impact global currency trading.

Today, the calendar is moderately interesting. In Europe, the German inflation data take centre stage. The consensus expects a slight rise of 0.1% M/M and 0.3% Y/Y (from 0.2% Y/Y). In theory, the report might be interesting just days ahead of the ECB decision on more stimulus. However, there is probably a big upward surprise needed for markets to question the scenario of big ECB stimulus. In the US, the Chicago PMI, the pending home sales and the Dallas Fed manufacturing activity index will be published. For the Chicago PMI, a limited setback from 56.2 to 54.00 is expected. Other recent survey evidence from the US suggests a downside risk of this indicator. On Friday, the risk‐off sentiment from China/Asia had little impact on European markets. The anticipation of further ECB stimulus blocked to the topside of the euro. With Thursday’s ECB meeting coming closer, investors might take some profit on the recent EMU bond rally. This can have limited positive spill‐over effects on the euro, or at least slow the decline of the single currency. Nervousness/volatility in EUR/USD might rise a bit. However, we don’t expect currency investors to really row against an expected aggressive ECB easing. Any euro upticks should stay temporary and relatively limited. USD/JPY is holding remarkably resilient even as sentiment, especially in Asia, turns less positive.

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.

Cable testing the 1.5027 support

On Friday, UK consumer confidence and Nationwide House prices were weaker than expected. The UK Q3 GDP was confirmed at 0.5% Q/Q and 2.3% Y/Y. Consumption remained the key driver of growth (0.8% Q.Q). The balance between export and import growth was more negative than expected. Cable declined further after the publication of the GDP data. However, this decline occurred in lockstep with the intraday decline of EUR/USD. The pair came close to the 1.5027 support, but a real test/break didn’t occur yet. Cable closed the session at 1.5036 (from 1.5102). The details of the UK Q3 GDP also didn’t help sterling against a broadly weaker euro. EUR/GBP basically hovered sideways in the 0.7025/50 area, well off the recent lows in the 0.6982 area. The pair ended the week at 0.7046 from 0.7025.

This morning, sterling is really testing the 1.5027 support. Later today, the UK money supply and lending data will be published. Of late lending activity data were a bit volatile but the trend remained constructive. However, given recent market sentiment, the data will probably have to be much better than expect to really support sterling. Euro weakness and a lack of visibility on the BoE rate hike intentions are currently weighing on sterling against the dollar. During the weekend, BoE’s Vlieghe talked rather dovish. So, day‐to‐day sentiment on sterling might remain cautious

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. 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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