In a day-to-day perspective, sentiment clearly turned negative on the EUR/USD cross rate. This was both due to dollar strength and euro weakness. We don't see a change in sentiment ahead of the ECB meeting. So, the risk remains for further euro losses.
The EUR/USD cross rate tested this morning the important ST support at 1.3462. The test was rejected, but the level remains within reach. A sustained break below this key level would further deteriorate the picture of EUR/USD.
At the end of last week, most major euro cross rates corrected south. A much lower than expected EMU CPI release (0.7% Y/Y in October), fuelled market speculation that the ECB will have to maintain a very accommodative bias for long. Markets even anticipate that further easing of policy, in one way or another, might be on the table at this week's ECB meeting.
EUR/GBP lost almost one big figure on Thursday after the publication of the EMU CPI data and dropped to the mid 0.84 area. On Friday, the UK PMI of the manufacturing sector was slightly weaker than expected at 56.0. However, the report confirmed the broader picture that the UK recovery is on track. The report had no material impact on EUR/GBP trading. EUR/GBP closed the session at 0.8569, little changed from the 0.8568 close on Thursday evening. At the same time, cable remained under pressure throughout the session on broad-based USD strength. Cable dropped below psychological barrier of 1.60 and closed the week near key support in the 1.59 area.
Today, the final EMU manufacturing PMI will be published. In the UK, we look out for the construction PMI. For the EMU PMI, we don't expect a substantial revision from the advance reading (51.3). The UK construction PMI is expected to the decline slightly from last month's 58.9 to 58.7. If so, this is still a very lofty level. At the margin, the data could be slightly supportive from sterling vis-à-vis the euro. However, today's data probably won't trigger a directional move. Markets will look forward to the ECB policy meeting which will be a key driver for euro trading this week. The euro already suffered a substantial correction last week but we don't see a trigger to improve sentiment on the single currency ahead of the ECB meeting. The ECB will continue to maintain a very soft tone and the market will continue to mull the options for further ECB easing. For the UK, this debate is closed. Of late, we were looking for signs that the EUR/GBP rebound might be finished. The EMU CPI report provided the perfect trigger for such a move. So, we start the week with a sell EUR/GBP on upticks approach.
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 & the US and expectations about ECB monetary easing nevertheless justified a further outperformance of sterling against both 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, but pair moved above the 0.8500/10. Last week's setback suggests that the correction has finally run its course. A cautious sell-on upticks bias is preferred.
The EUR/USD cross rate tested this morning the important ST support at 1.3462. The test was rejected, but the level remains within reach. A sustained break below this key level would further deteriorate the picture of EUR/USD.
At the end of last week, most major euro cross rates corrected south. A much lower than expected EMU CPI release (0.7% Y/Y in October), fuelled market speculation that the ECB will have to maintain a very accommodative bias for long. Markets even anticipate that further easing of policy, in one way or another, might be on the table at this week's ECB meeting.
EUR/GBP lost almost one big figure on Thursday after the publication of the EMU CPI data and dropped to the mid 0.84 area. On Friday, the UK PMI of the manufacturing sector was slightly weaker than expected at 56.0. However, the report confirmed the broader picture that the UK recovery is on track. The report had no material impact on EUR/GBP trading. EUR/GBP closed the session at 0.8569, little changed from the 0.8568 close on Thursday evening. At the same time, cable remained under pressure throughout the session on broad-based USD strength. Cable dropped below psychological barrier of 1.60 and closed the week near key support in the 1.59 area.
Today, the final EMU manufacturing PMI will be published. In the UK, we look out for the construction PMI. For the EMU PMI, we don't expect a substantial revision from the advance reading (51.3). The UK construction PMI is expected to the decline slightly from last month's 58.9 to 58.7. If so, this is still a very lofty level. At the margin, the data could be slightly supportive from sterling vis-à-vis the euro. However, today's data probably won't trigger a directional move. Markets will look forward to the ECB policy meeting which will be a key driver for euro trading this week. The euro already suffered a substantial correction last week but we don't see a trigger to improve sentiment on the single currency ahead of the ECB meeting. The ECB will continue to maintain a very soft tone and the market will continue to mull the options for further ECB easing. For the UK, this debate is closed. Of late, we were looking for signs that the EUR/GBP rebound might be finished. The EMU CPI report provided the perfect trigger for such a move. So, we start the week with a sell EUR/GBP on upticks approach.
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 & the US and expectations about ECB monetary easing nevertheless justified a further outperformance of sterling against both 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, but pair moved above the 0.8500/10. Last week's setback suggests that the correction has finally run its course. A cautious sell-on upticks bias is preferred.
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