KBC Market Research Desk
KBC Bank
EUR/USD near next support
On Wednesday, USD trading was driven by technical considerations in absence of high profile news. The dollar held strong against the euro. EUR/USD drifted further below the 1.10 handle. At the same time USD/JPY drifted lower in the 103 big figure. The reaction of the dollar to a fairly optimistic Beige Book was minimal. EUR/USD finished the session at 1.0974 (from 1.0981). USD/JPY finished the day at 103.44 (from 103.87).
Overnight, Asian equities record gains of up to 1%. Clinton cemented her advantage over Donald Trump in the last TV debate before the election. The outcome creates a cautiously positive risk sentiment and is slightly supportive for the dollar. USD/JPY trades in the 103.65 area. EUR/USD trades in the 1.0960/65 area, within reach of the 1.0952 support. The Aussie dollar ceded ground as the Australian labour data disappointed. AUD/USD dropped back below the 0.77 handle after a good rally of late. The Canadian dollar trades slightly in the defensive, despite a higher oil price. BOC governor Poloz indicated after yesterday's policy decision that the BOC actively discussed the option to add more stimulus. USD/CAD trades in the 1.3150 area.
Today, the focus for EUR/USD is on the ECB press conference . For a full preview of the ECB meeting, see our Flash report.
Despite lingering uncertainty, markets are pondering whether monetary policy has reached a turning point. Inflation expectations are bottoming out and the yield curve steepens. In this context, the market focus could move away from expectations of further easing and turn to the implications of the ECB potentially reducing its asset purchases. This should steepen further the EMU curve and might support the euro. However, we don't expect any concrete signal from the ECB today. Draghi asked ECB Committees evaluating the options to ensure "a smooth implementation" of the asset programme. We expect communication in December. Regarding the US data, initial claims are expected slightly higher at 250K after a very low 246K. Claims recently surprised on the downside, but at current low level we expect a slight increase. The Philly Fed manufacturing index surpisingly jumped in September from 12.8 to 2, but the details were mixed. We favour a drop in October, but expect the index to stay in positive territory. Finally, the Existing home sales are expected marginally higher in September at 5.35M/M.
In a daily perspective, the postive risk-sentiment after the US presidentinal debate might be sligtly USD supportive. The ECB press conference is a widlcard, but we expect Draghi to avoid making market moving remarkets We look out whether the 1.0952 support will hold. In a braoder perspetive, the recent dollar rally slowed this week. We don't expect any correction to go far unless US data would be unexpectedly soft. Some further consolidation might be on the cards but we still see a solid bottom for the dollar as long as markets embrace the idea of a December rate hike. Selling EUR/USD on upticks is favoured.
From a technical point of view, EUR/USD came within reach of the 1.0952/13 support, but for now it was left intact. A break below would be a USD positive and open the way for next intermediate support (1.0822/1.0711). A similar pattern is developing for USD/JPY. A sustained break north of 104.32 would paint a double bottom formation on the charts with targets in the 108/109 area. The area was extensively tested, but a sustained break didn't occur. We stay cautious on sustained USD/JPY gains beyond the 104.32/65 resistance especially as global volatility/uncertainty might intensify.
UK retail sales in focus for sterling trading
On Wednesday, cable and EUR/GBP traded in tight ranges. The UK labour data were OK, but close to expectations. Sterling initially gained a few ticks, but the rebound ran into resistance soon. During the day, there were rumours that Angela Merkel had instructed her administration not to engage in informal talks with the UK on Brexit. So, the Brexit debate still played at the background.
Once again, the headlines had no lasting negative impact on sterling. EUR/GBP closed the session at 0.8931 (from 0.8929). Cable closed the session at 1.2285 (from 1.2298).
Today, the UK September retail sales will be published. There was a modest setback in August, but in general the UK consumer held strong in the wake of the Brexit vote. Sales are expected to have softened to 0.0% M/M and 4.0% Y/Y.
Of late UK data had less impact on sterling trading as it is unclear how they will affect the BoE reaction function. Will the BoE give a bit more weight to the decline of sterling and the rise of inflation. The jury is still out. In the end we assume that growth will remain the key driver for the BoE policy. So, a really poor UK retail sales figure might still weigh on sterling. This week sterling rebounded as markets assume that more Parliamentary involvement reduce the risk of a hard Brexit. However, we don't expect this sterling rebound to go far. We look to sell sterling on more pronounced up-ticks.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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