EUR/GBP decline slows

Dollar in good shape ahead of key (US) data

On Monday EUR/USD and USD/JPY trading took a calm start for the month as US markets were closed in observance of the Labour Day Holiday. EUR/USD set a new correction low in the 1.3120 area, but there were no follow-through losses despite a disappointing EMU manufacturing PMI. The dollar remains well bid with USD/JPY holding easily above 104 despite poor global eco data and ongoing tensions in Ukraine.

Overnight, the dollar remains in good shape. EUR/USD touched a minor new low in the 1.3115 area. USD/JPY is again an outperformer. The pair is changing hands in the 104.80 area. Investors are apparently preparing for a set of good US eco data today and later this week. At the same time, Japan labour cash earnings rose at 2.6% Y/Y from 1% the previous month. The July reading is the highest since 1997. Japanese equities are an obvious beneficiary of the rise in USD/JPY. Other Asian equities show a mixed picture. The RBA as expected left its policy rate unchanged. The RBA repeated that it sees a likely period of interest rate stability. At the same time, the bank maintained the view that the Aussie dollar is overvalued. The Aussie dollar is slightly under pressure against the US dollar, but the latter is in good shape across the board.

Later today, only second tier eco data in Europe, but in the US we look out for the US manufacturing ISM. The headline index is expected marginally lower at 57.00 from 57.1. Recently, comparable indicators from most other major economies (in particular in Europe) showed a sluggish momentum. So, it will be interesting to see whether the US manufacturing confidence manages to withstand doubts on growth from elsewhere. If so, this positive divergence would be an additional positive for the dollar. Ukraine remains a wildcard, but we don’t think it will have negative effects on the dollar, unless an (unexpected) sharp drop in yields would occur.

From a technical point of view, the dollar is near key technical resistance levels against the euro and the yen. EUR/USD is close to the 1.3105 level (Sept 2013 low), while USD/JPY is nearing the 105.44 January top. A break beyond would be significant for the broader picture of the US currency. EUR/USD is in oversold territory, but this didn’t prevent a gradual further decline of late.

In a longer term perspective, the EUR/USD downtrend stays intact. EUR/USD dropped below the 1.3296 support, opening the way to the 1.3105 target (Sept 2013 low). 1.2755/1.2662 is key longer term. A more pronounced correction (EUR/USD rebound) is still an opportunity to add EUR/USD short exposure. The EUR/USD downtrend remains intact as long as the pair holds below 1.3345.

EUR/GBP decline slows

On Monday, EUR/GBP slipped below the 0.79 barrier early in Europe as uncertainty on Ukraine and poor EMU PMI’s weighed on the euro. However, the UK manufacturing PMI also missed consensus by a wide margin. The UK measure dropped from 54.8 to 52.5 (55.1 was expected). At the same time, the UK money supply and lending data were slightly stronger than expected. Even so, the disappointment on the PMI release prevailed. EUR/GBP reversed the earlier losses and returned to the 0.7910 area. Cable lost a few ticks too, but the pair stayed north of the 1.66 level suggesting that underlying sentiment on the UK currency is still quite positive. The pair traded in the low 0.79 area late in the session yesterday.

Overnight, overall US strength is affecting the sterling cross rates, too. Cable dropped back below the 1.66 mark. For now, EUR/USD slightly outperforms cable, pushing EUR/GBP marginally higher. However, this pattern can still change during European or US trading.
Later today, only the UK Aug construction PMI is scheduled for release in the UK. A moderate setback from 62.4 to 61.5 is expected. This is still a very high level. The construction PMI is usually less important for markets than the manufacturing and the services measure. However, after yesterday’s poor manufacturing report, the construction PMI might get some more attention. The loss of sterling yesterday was very limited, but another negative surprise might cause nervousness among sterling longs.

In August, sterling fell prey to profit taking, as the UK data turned a bit mixed. Especially ongoing low wage growth helped BoE’s Carney to fend off calls for early rate action. At the same time, the BoE minutes showed that two members voted for a rate hike in August. EUR/GBP settled in a 0.7875/0.8035 consolidation range. The sell-off in cable was in first place due to dollar strength. EUR/GBP touched a correction top in the 0.8035 area mid-August, but global euro weakness prevented a further rise. This area is now a new strong resistance for the EUR/GBP cross rate. We reinstalled a sell-on-upticks approach. The 2014 low (0.7874) is the first important support. We maintain our LT bearish view on the euro with EUR/GBP 0.7755 as a target.