USD/JPY under pressure, but no break yet

On Wednesday, global equities turned again sharply lower. Early in the session, the dollar also felt the heat. However, key support levels held again under severe test. USD/JPY dropped briefly below the 116.18 August low, but rebounded. US equities regained most of the heavy intra-day losses late the session, helping the dollar off the intraday lows. USD/JPY closed the session at 116.94 (from 117.64 on Tuesday) EUR/USD ended session at 1.0890 from 1.0908. USD trading was again driven by global factors, as data were ignored.

This morning, sentiment on Asian markets remains fragile. The late session rebound in the US initially eased regional tensions, but Asian equities are again sliding lower as the session proceeds, as is oil that is still within reach of the recent lows. The PBOC took several measures to ease liquidity conditions on the domestic market and kept the USD/CNY fixing little changed. The off shore yuan trades marginally weaker at 6.6115. The pressure on the Hong Kong dollar eases slightly with USD/HKD currently at 7.8135. USD/JPY jumped well above 117 early in the session, but trades currently again at 116.80 as equities are again under pressure. EUR/USD holds close to the 1.09 pivot.

Today, the focus will be on the ECB meeting. Data (EMU Consumer confidence Philly Fed business outlook and the jobless claims) are less important with risks to the downside of expectations. If downside risks materialize, it might be slightly negative for the dollar. The ECB press conference and the further developments in the global market crisis will remain the drivers for currency trading. Draghi will holds a soft tone, but after modest/disappointing easing at the December meeting, markets might be cautions to discount more easing than priced in. Even so, the message from the ECB president might be slightly negative for the euro. Looking at the price action in Asia, risk sentiment is still fragile, which is a negative for the dollar. So, USD/JPY might go for a retest of the recent low in the 116 area. For EUR/USD, the 1.0985/1.10 area yesterday proved to be a tough resistance even as sentiment on risk was very negative. The pair feels some upward pressure, but we don’t preposition for a break.

From a technical point of view, EUR/USD failed to regain important resistances at 1.1087 (breakdown) and 1.1124 (62% retracement from the October high).

Two weeks ago, EUR/USD failed also to sustain below 1.0796 support (07 Dec low). Next support is at 1.0650 (76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.0985/1.1004 (reaction top) is a first reference. This level was left intact even as sentiment was outright risk-off over the previous days. Next resistance comes in at 1.1060/1.1124 (15 Dec top/62% retracement). We expect this resistance to be strong and difficult to break. Even so, a test becomes more likely if global sentiment deteriorates further. The picture for USD/JPY remains negative below 120. The 116.18 August low was temporary broken yesterday, but no sustained break occurred. The bias remains to the downside.

Good labour report eases sterling tensions

On Wednesday, the swings in sterling were rather modest, given the global negative investors sentiment and considering sterling’s sell-off on Tuesday after a soft speech of BoE Carney. Sterling extended its decline in Asia and early in Europe. Cable set a now multi-year low at 1.4126.
EUR/GBP filled offers in the 0.7755 area just before the publication of the UK labour data. The UK labour market report was good with the unemployed rate declining from 5.2% to 5.1% and with strong job growth (267 000 3M/3M). At the same time, wage growth was again modest 1.9% (3M avg Y/Y ex bonus). The figure was marginally stronger than expected. However, this is clear not the domestic price push that Carney is looking for. Even so, EUR/GBP came off the intraday highs and closed the day at 0.7674. Admittedly, this was partially due to the decline in EUR/USD. Cable hovered mostly sideways and closed at 1.4292 (from 1.4158).

This morning, the only UK eco release of the day, the RICS house price balance, was marginally stronger at 50% from 49%, in line with expectations. Sterling is drifting slightly weaker as sentiment on risk deteriorates in Asia.
Yesterday, the performance of sterling wasn’t that bad given poor global sentiment and the soft speech from BoE Carney on Tuesday. It will be interesting to see whether sterling becomes more resilient global negative sentiment continues. For now, we stay cautions on sterling and wait whether the recent lows again the euro and the dollar will hold.

In a longer term perspective, uncertainty on Brexit and global negative risk sentiment are important drivers for sterling weakness. As long as these issues aren’t solved, a sustained sterling rebound is unlikely. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Next resistance stands at 0.7875. Sterling is in oversold territory against the euro and the dollar, but it is no reason to rush into sterling longs.

•  Download Full Sunrise Market Commentary Currencies