UK inflation key for sterling trading

EUR/USD clears 1.1489/1.15 resistance

On Monday, the dollar remained on the defensive after recent soft US price data, but the moves were modest as there was no high profile news. EUR/USD settled close to the recent top, but there was no trigger for a test. USD/JPY even tried a cautious intraday rebound but closed the session little changed at 112.63.

Overnight, the dollar came under broad pressure as divisions within the US Republicans make a repeal of Obamacare unlikely. This failure is reinforcing investor doubts on the ability of the Trump administration to execute profound reforms. EUR/USD jumped from 1.1480 to the 1.1538 area. USD/JPY dropped to the low 112 area. This uncertainty also weighs on Asian equities. The Aussie dollar outperforms on overall dollar weakness. In the minutes of the July meeting, the RBA didn't give concrete hints that it will raise rates soon. However, the bank is positive on the economy and the labour market and sees the neutral policy rate at 3.5%. AUD/USD jumped a full big figure and trades in the 0.79 area, the highest level in more than two years. The Kiwi dollar initially nosedived on lower than expected inflation, but rebounded on the overall USD-decline. NZD/USD trades around 0.7340.

Today, the eco calendar is modestly interesting. German ZEW investor confidence is expected little changed (88.0). In the US, import prices are expected to soften further. The NAHB housing index is expected unchanged at 67. Usually, these data are no markets movers. However, given the current negative USD momentum, a negative surprise might still cause some further repositioning away from the dollar.

The dollar remained in the defensive of late. Mediocre US wage growth, Yellen's focus on the recent setback in inflation and soft eco data made markets questioning the pace of future Fed normalisation and weighed on the USD. Initially, EUR/USD didn't retest the 1.1489/1.15 resistance, but this area was broken this morning. The move is clearly USD weakness rather than anything else. Thursday's ECB policy decision is an additional factor of uncertainty. We don't expect the ECB president to make a big announcement on policy normalisation. However, this is no guaranty for the EUR/USD rebound to halt. In a longer term perspective, the market discounts very little Fed policy normalisation. At some point this might lend the dollar support. However, in a day-to-day perspective, there is no reason to try to catch the falling USD.

 

USD: technical picture worsens further

End June, EUR/USD rebounded above the 1.1300/66 resistance. The payrolls and other recent data were not good enough to trigger a sustained USD rebound. Today, EUR/USD broke beyond the 1.1489/1.15 resistance. This break opens the door to the LT-correction tops at 1.1616/1.1714. A break would end the long consolidation that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area is not easy to break. We don't preposition for a break, but the pressure is mounting. Return action, below 1.13 would be a first indication of a loss in upside momentum. EUR/USD 1.1119/10 is the next important support.

The USD/JPY rally ran into resistance in early May and the pair returned lower in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair above the 112.13 correction top, but follow-through gains remain modest. USD/JPY 114.37 resistance was tested, but for now the test is rejected. This at least suggests a pause in the recent USD/JPY uptrend. We stay cautious on USD/JPY long positions despite the recent decent performance.

 

UK inflation key for sterling trading

Yesterday, last week's sterling rebound slowed and the UK currency even fell prey to a modest reversal. There was no high profile story. Many headlines about discord within the UK government going into the next round of Brexit negotiations might have caused some sterling caution. Cable dropped off the correction top north of 1.31 and closed the session at 1.3055. EUR/GBP profited from sterling softness and EUR/USD strength and closed the session at 0.8793.

Overnight, the USD decline also affects cable and EUR/USD. The latter rebounded north of 0.88. Cable returned to the 1.31 area. Later today, the focus for sterling trading will turn to the UK inflation. Headline and core CPI are both expected unchanged at respectively 2.9% Y/Y and 2.6% Y/Y. Of late, the BoE sent quite some conflicting signals whether a rate hike could be needed in the near future. Headline inflation rising to 3.0% or more will reactivate this debate. However, we expect any support for sterling to remain modest and temporary. The BOE isn't at the eve of a protracted rate hike cycle.

From a technical point of view, EUR/GBP recently set a minor top north of 0.8854/66 resistance (2017 top) and temporary broke above the 0.89 barrier but the move finally fell prey to profit taking (sterling short squeeze). A break below 0.8720 would suggest that upside momentum is easing. For now, we still see a sterling rebound as technical in nature and don't expect it to last very long. We still look to buy EUR/GBP on more pronounced dips.

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