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Article / Tuesday at 8:34 GMT

FX Update: UK CPI, EURUSD line in the sand the focus today

Head of FX Strategy / Saxo Bank
Denmark
  • EURUSD is bid into a key resistance area once again
  • CPI releases mans its an important day for SEK and GBP
  • Focus – Yellen, Draghi, Kuroda and Carney all speak at Frankfurt conference

bergen
 The Norwegian economy is growing faster than was anticipated. Pic: Shutterstock

By John J Hardy

A bit more interest in the Scandies today as Norway GDP comes in slightly above expectations for the “mainland” (an attempt to take energy out of the equation), at +0.6% QoQ vs. +0.5% expected, while the aggregate number was +0.7%. This is not impressive stuff, given that Norway is dipping into its oil fund and revenues to the tune of a 7.7% of GDP budget deficit. The number arrives as EURNOK is testing the highs of the recent range above 9.50 and with scant further resistance higher if the rally there continues. We see strong risk of a test of the 9.75 area if oil suffers a significant correction. The Swedish krona, meanwhile, is in a similar technical situation, pushing on the range resistance just above 9.80 and risking a capitulation to 10.00 if the Swedish CPI print today falls more than expected (a bit of a tall order, as the number is expected to drop at the headline from 2.1% to 1.8% YoY and at the core from +2.3% to 2.0%) as the Riksbank will be seen as dragging its feet on unwinding policy even further. 

Today’s focus is on virtually every central banker of note out speaking at an ECB conference in Frankfurt, which even features a panel later today featuring Janet Yellen, Mario Draghi, Haruhiko Kuroda and Mark Carney. We’re unlikely to get any shocking turns of phrase, but trader should be on their toes. 

Meanwhile, one of the more interesting signals at the moment is in global bond markets, where we have seen a sharp sell-off. In recent weeks, we have looked for rises in yields to be driven by US data and policy risks, but it looks this time around as if the main driver is the European long end, even if this is still pretty modest stuff and within the recent ranges, if we look at the German bund yield, for example, which has pulled higher from the range low near 32 bps to about 43 bps as of this writing. This is perhaps most immediately compelling for EURCHF as long as risk appetite remains stable or better. The yen rally has wilted again on the rise in yields, with EURJPY continuing to steer clear of the big line in the sand around 131.50.

Elsewhere, the range in key sterling pairs is under assault as today’s UK Oct. CPI release approaches – EURGBP runs out of range. Still, it is very difficult to sustain a directional move on the back of UK data until we get a firmer look at the status of Brexit negotiations into the EU summit in mid-December. My suspicion is that any notable break higher on an ugly CPI spike will be quickly countered with more stern language from the BoE, but sterling looks weak for the moment until proven otherwise.

Chart: EURUSD
EURUSD this morning is testing above the head and shoulders neckline around 1.1675 and even the local high near 1.1690 – a close above 1.1700 today or in the coming session or two threatens to end the downside focus for the pair – watching daily closing levels for direction either way. Worth noting that euro doing all of the lifting here – USD looks rather firm elsewhere.
eurusd
 Source: Saxo Bank

The G-10 rundown
USD – the greenback is broadly mixed, lacking any form of catalyst until tomorrow’s CPI and Retail Sales data and still awaiting the important tax reform outcome in coming weeks.
EUR – the euro poking stronger across the board, and above a key technical level in EURUSD this morning. We got a solid GDP print from Germany this morning and European bond yields seem to be leading the charge higher at the moment, perhaps as bond portfolios begin to reprice bonds for post-ECB QE.
JPY – the rise in yields and sidelining of the risk-off impulse yesterday helping the yen back lower. The yen is an easy sell when the risk mood is rosy and yields are rising, but becomes a more difficult beast when the risk and yield directions are moving in opposite direction.
GBP – EURGBP hitting on resistance soon if the UK CPI data fails to print as high as expected (3.1% on the headline). Always ironic, these CPI releases – as the market trades the potential for the CB to do something about what should be negative news for the currency – that inflation is running so high.
CHF – EURCHF looking bid and ready to challenge the 1.1700 top if yields continue rising here. USDCHF less interesting if EURCHF and EURUSD are rallying, more potentially interesting if today’s EURUSD rally bid fails.
AUD – a decent boost to the rate outlook overnight on a very strong business conditions survey. These survey are essentially worthless in the bigger picture as they are often laggards, but it did feed into the short end of the rate curve and AUD is making it difficult for AUDUSD bears as the break to new lows was suddenly stopped in its tracks overnight – watching the status of that pair into the end of today’s trade.
CAD – USDCAD trying to shift the focus back higher – a pull to 1.2800 or so does the trick, and then up to relative CPI data from US (tomorrow) and Canada (Fri) this week.
NZD – suffered fresh weakness overnight and AUDNZD has revved back to life .
SEK – Sweden CPI print up this morning and the arbiter of SEK’s fate at the pivotal 9.80 area in EURSEK.
NOK – EURNOK pushing at the recent cycle highs despite the marginal GDP beat – suggests NOK remains vulnerable under the thumb of the strong Euro. The next resistance levels at 9.63 and then 9.75.
Upcoming Economic Calendar Highlights (all times GMT)
  • 0830 – Sweden Oct. CPI 
  • 0900 – ECB’s Lautenschlaeger, Nouy to Speak 
  • 0930 – UK Oct. CPI / RPI / PPI 
  • 1000 – Euro Zone Sep. Industrial Production 
  • 1000 – Germany Nov. ZEW Survey 
  • 1000 – Yellen, Draghi, Kuroda, Carney on Panel 
  • 1000 – Euro Zone Q3 GDP 
  • 1315 – US Fed’s Bullard (FOMC Non-voter) to speak 
  • 1330 – US Oct. PPI 
  • 1530 – ECB’s Coeure to Speak 
  • 1730 – UK BoE’s Cunliffe to Speak 

– Edited by Clare MacCarthy

 

John J Hardy is head of FX strategy at Saxo Bank

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