EUR/USD
On Wednesday, EUR/USD traded with a slight upward bias in the run-up to the FOMC decision, but had to give its minor gains back after the FOMC decision and closed little changed at 1.3736 versus 1.3745 on Tuesday. The FOMC statement was less dovish than markets had hoped for. The dollar modestly gained across the board (see graph trade weighted dollar), but against the euro these gains were minimal. In other markets, equities and bonds corrected lower, as they too were positioned for a still more dovish Fed. Actually, the FOMC kept its policy unchanged, changed its statement only in some minor way. So, there is no hint whatsoever on the timing of tapering of its QE programme.
Today, ECB Nowotny spoke on CNBC during Asian trading hours. He emphasized that the ECB wants to avoid that the ending of the (LTRO) program would have some kind of cliff effects. Therefore he said that is clear that there will be some kind of liquidity provisions to take care of this issue. He also stressed that it was important to inform markets sooner rather than later. In this respect, next week's ECB meeting could be a first opportunity. The prospect of more liquidity in the future is a euro negative. Of course, details are still missing and in the case of Europe it is probably more "avoiding that liquidity declines" than really "boosting liquidity" as the Fed is still doing. So, while the correction lower in EUR/USD yesterday was minimal, there are some reasons to expect the pair to correct somewhat more downward due to this potential ECB policy change. Today, EMU inflation will probably drop below 1% (target ECB close to 2%). The banking lending survey showed yesterday a very slow improvement in the bank lending, another reason of concern for the ECB, while the unemployment rate (to be published today) will stabilize near record highs. All together this suggests that attention will turn now to next week's ECB with increasing expectations that the ECB might announce an easing of policy. Therefore, we favour short term a decline of EUR/USD. However, there is no reason to see it as a more long-lasting turn. The US eco calendar contains the initial claims and the Chicago PMI. The former might be distorted and thus should be ignored. The risks for the Chicago PMI are on the downside, but we suspect it won't get too much attention. Tomorrow's ISM survey may be more important
Global view. The expected postponement of the tapering of the Fed's asset purchase programme to March 2014 creates a negative context for the dollar. After the recent repositioning on the currency and interest rate markets, a lot of dollar-negative news (Fed sidelined for long) has nevertheless already been priced in. However, the break above the technically important 1.3711 resistance (2013 high) after the US payrolls release illustrates the ongoing negative USD sentiment. We think that the valuation of EUR/USD is becoming stretched when nearing the 1.40 barrier. On the euro side of the story, comments from the ECB on the value on the euro and on its impact on inflation and monetary policy are key. The ECB is in a very difficult situation as a stronger euro threatens to nip the nascent recovery in the butt. Following steep and long recessions in the periphery, another relapse into recession would once more call into question the survival of the euro area in its current composition. However, the ECB language on the euro should be quite strong to make markets believe that further monetary easing is likely. Nowotny's comments on liquidity suggest that it will remain an important theme in the next week
Even in case of ECB measures, it remains to be seen whether developments on the euro side may trump developments on the USD side (Fed). Going against the latter is always a difficult exercise for non-US central bankers. In this context, the ECB should carefully gauge if and when it should try to talk down the euro.
From a technical point of view, the EUR/USD picture is bullish. The pair rallied as a test of key support at 1.2745 (2013 low) early July failed. After a modest correction in the second half of August, the rally resumed and following the FOMC decision not to taper in mid-September, it broke above 1.3369/1.3452 resistance. A double bottom formation appeared on the charts. After the US fiscal deal that reopened government, but also galvanized expectations that the FOMC was side-lined for longer, EUR/USD broke above the 2013 high, touching the 62% retracement at 1.3833. The pair is in overbought conditions, which may result in some correction, but as long as the pair stays above 1.3369/1.3452, the picture remains bullish with next key resistances at 1.40 (psycho/ line in sand ECB?) and 1.4248 (26 Oct 2011 high). In Fibonnacci terms, a move above 1.3833 (62% retracement) raises the odds for a complete retracement of the 1.4940 (5 May 2011 high) to 1.2054 (25 July 2012 low) down-move
EUR/USD: technical picture is bullish as 2013 high was taken out. Overbought conditions/position squaring initiates correction, today helped by Nowotny's comments. Remains bullish as long as above 1.3369/1.3452
EUR/GBP
On Wednesday, EUR/GBP hovered sideways around Tuesday's close (0.8566) as the UK calendar was empty and EMU data were largely ignored. Trading actually evolved between about 0.8556 and 0.8577. Also cable was sideways oriented. The FOMC decision brought some volatility, but the initial dip lower was largely reversed afterwards and left cable at 1.6039 in the close, marginally down from 1.6047 the day before.
Overnight, EUR/GBP is in the defensive, just like EUR/USD. The main culprit is ECB's Nowotny who suggested that the ECB may soon announce new liquidity measures (see EUR/USD section). UK eco releases this morning were mixed. Housing prices continued to accelerate, but consumer confidence worsened unexpectedly. However, effects on sterling are modest
Today, the EMU calendar contains HICP inflation and unemployment rate. Earlier today, German consumer confidence and retail sales printed softer than expected. Inflation will probably have dropped below 1% Y/Y in October (target ECB close to 2%) while the unemployment rate (to be published today) will stabilize near record highs. The Bank Lending Survey showed yesterday a slow improvement in the bank lending conditions, remaining a concern for the ECB. Adding to the Nowotny comments, this suggests that attention will now turn to next week's ECB meeting with increasing expectations that the ECB might announce an easing of policy. Therefore, we might see sterling recover from recent weakness. We closely watch for technical signals that the uptrend in EUR/GBP is finished.
Global context. Sterling strengthened sharply against the euro and dollar in August and September. EUR/GBP dropped to the bottom of the 0.88/0.8400 trading range. Political upheaval in Italy & US and expectations about ECB monetary easing nevertheless justified a further outperformance of sterling against the euro and dollar. EUR/GBP dipped gradually below the key 0.84 level, the neckline of a very nice double top formation. However, the sterling rally stalled and EUR/GBP corrected higher, while cable kept its gains. The resolution of the political crisis in Italy and a less dovish ECB at its October meeting favoured the euro overall, in combination with the fiscal bickering between the US main political parties. At the same time, sterling was overbought and the UK data were a bit more mixed compared to (increased expectations). We had a negative bias for EUR/GBP and were waiting for the correction to run its course. However, the pair moved above the 0.8500/10 resistance last week, questioning our ST negative bias for EUR/GBP.
On Wednesday, EUR/USD traded with a slight upward bias in the run-up to the FOMC decision, but had to give its minor gains back after the FOMC decision and closed little changed at 1.3736 versus 1.3745 on Tuesday. The FOMC statement was less dovish than markets had hoped for. The dollar modestly gained across the board (see graph trade weighted dollar), but against the euro these gains were minimal. In other markets, equities and bonds corrected lower, as they too were positioned for a still more dovish Fed. Actually, the FOMC kept its policy unchanged, changed its statement only in some minor way. So, there is no hint whatsoever on the timing of tapering of its QE programme.
Today, ECB Nowotny spoke on CNBC during Asian trading hours. He emphasized that the ECB wants to avoid that the ending of the (LTRO) program would have some kind of cliff effects. Therefore he said that is clear that there will be some kind of liquidity provisions to take care of this issue. He also stressed that it was important to inform markets sooner rather than later. In this respect, next week's ECB meeting could be a first opportunity. The prospect of more liquidity in the future is a euro negative. Of course, details are still missing and in the case of Europe it is probably more "avoiding that liquidity declines" than really "boosting liquidity" as the Fed is still doing. So, while the correction lower in EUR/USD yesterday was minimal, there are some reasons to expect the pair to correct somewhat more downward due to this potential ECB policy change. Today, EMU inflation will probably drop below 1% (target ECB close to 2%). The banking lending survey showed yesterday a very slow improvement in the bank lending, another reason of concern for the ECB, while the unemployment rate (to be published today) will stabilize near record highs. All together this suggests that attention will turn now to next week's ECB with increasing expectations that the ECB might announce an easing of policy. Therefore, we favour short term a decline of EUR/USD. However, there is no reason to see it as a more long-lasting turn. The US eco calendar contains the initial claims and the Chicago PMI. The former might be distorted and thus should be ignored. The risks for the Chicago PMI are on the downside, but we suspect it won't get too much attention. Tomorrow's ISM survey may be more important
Global view. The expected postponement of the tapering of the Fed's asset purchase programme to March 2014 creates a negative context for the dollar. After the recent repositioning on the currency and interest rate markets, a lot of dollar-negative news (Fed sidelined for long) has nevertheless already been priced in. However, the break above the technically important 1.3711 resistance (2013 high) after the US payrolls release illustrates the ongoing negative USD sentiment. We think that the valuation of EUR/USD is becoming stretched when nearing the 1.40 barrier. On the euro side of the story, comments from the ECB on the value on the euro and on its impact on inflation and monetary policy are key. The ECB is in a very difficult situation as a stronger euro threatens to nip the nascent recovery in the butt. Following steep and long recessions in the periphery, another relapse into recession would once more call into question the survival of the euro area in its current composition. However, the ECB language on the euro should be quite strong to make markets believe that further monetary easing is likely. Nowotny's comments on liquidity suggest that it will remain an important theme in the next week
Even in case of ECB measures, it remains to be seen whether developments on the euro side may trump developments on the USD side (Fed). Going against the latter is always a difficult exercise for non-US central bankers. In this context, the ECB should carefully gauge if and when it should try to talk down the euro.
From a technical point of view, the EUR/USD picture is bullish. The pair rallied as a test of key support at 1.2745 (2013 low) early July failed. After a modest correction in the second half of August, the rally resumed and following the FOMC decision not to taper in mid-September, it broke above 1.3369/1.3452 resistance. A double bottom formation appeared on the charts. After the US fiscal deal that reopened government, but also galvanized expectations that the FOMC was side-lined for longer, EUR/USD broke above the 2013 high, touching the 62% retracement at 1.3833. The pair is in overbought conditions, which may result in some correction, but as long as the pair stays above 1.3369/1.3452, the picture remains bullish with next key resistances at 1.40 (psycho/ line in sand ECB?) and 1.4248 (26 Oct 2011 high). In Fibonnacci terms, a move above 1.3833 (62% retracement) raises the odds for a complete retracement of the 1.4940 (5 May 2011 high) to 1.2054 (25 July 2012 low) down-move
EUR/USD: technical picture is bullish as 2013 high was taken out. Overbought conditions/position squaring initiates correction, today helped by Nowotny's comments. Remains bullish as long as above 1.3369/1.3452
EUR/GBP
On Wednesday, EUR/GBP hovered sideways around Tuesday's close (0.8566) as the UK calendar was empty and EMU data were largely ignored. Trading actually evolved between about 0.8556 and 0.8577. Also cable was sideways oriented. The FOMC decision brought some volatility, but the initial dip lower was largely reversed afterwards and left cable at 1.6039 in the close, marginally down from 1.6047 the day before.
Overnight, EUR/GBP is in the defensive, just like EUR/USD. The main culprit is ECB's Nowotny who suggested that the ECB may soon announce new liquidity measures (see EUR/USD section). UK eco releases this morning were mixed. Housing prices continued to accelerate, but consumer confidence worsened unexpectedly. However, effects on sterling are modest
Today, the EMU calendar contains HICP inflation and unemployment rate. Earlier today, German consumer confidence and retail sales printed softer than expected. Inflation will probably have dropped below 1% Y/Y in October (target ECB close to 2%) while the unemployment rate (to be published today) will stabilize near record highs. The Bank Lending Survey showed yesterday a slow improvement in the bank lending conditions, remaining a concern for the ECB. Adding to the Nowotny comments, this suggests that attention will now turn to next week's ECB meeting with increasing expectations that the ECB might announce an easing of policy. Therefore, we might see sterling recover from recent weakness. We closely watch for technical signals that the uptrend in EUR/GBP is finished.
Global context. Sterling strengthened sharply against the euro and dollar in August and September. EUR/GBP dropped to the bottom of the 0.88/0.8400 trading range. Political upheaval in Italy & US and expectations about ECB monetary easing nevertheless justified a further outperformance of sterling against the euro and dollar. EUR/GBP dipped gradually below the key 0.84 level, the neckline of a very nice double top formation. However, the sterling rally stalled and EUR/GBP corrected higher, while cable kept its gains. The resolution of the political crisis in Italy and a less dovish ECB at its October meeting favoured the euro overall, in combination with the fiscal bickering between the US main political parties. At the same time, sterling was overbought and the UK data were a bit more mixed compared to (increased expectations). We had a negative bias for EUR/GBP and were waiting for the correction to run its course. However, the pair moved above the 0.8500/10 resistance last week, questioning our ST negative bias for EUR/GBP.
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