There was nothing in the way of major data through the morning session yesterday with the US and Canada both on holiday to keep the afternoon session subdued. The cautious sentiment that welcomed in the week following North Korean missile tests remained throughout, as European bourses traded lower on the day while US futures stayed in the red. The USD was pretty much neutral on the day with the USD index little changed, while the euro was slightly firmer. GBP crosses stayed well within recent their recent scope with GBPUSD and EURGBP holding a .5% range, the pound weakening slightly later in the day.
Overnight the JPY continued to find some demand, however we’ve not seen the follow through for risk aversion across other asset classes with things turning slightly more positive this morning as European indices open higher. Gold has been facing sellers and in the last couple of hours JPY has also been selling off. US President Donald Trump joined others in the condemnation of North Korea’s continued aggression and while Merkel, Trump and South Korea’s Moon appear to be pushing for tougher sanctions on NK, others like Russia and China do not appear as keen. This will likely continue to be a subplot in market direction this week, and while not the main even it can certainly cause a material impact in this week’s outcome
The main event continues to be the ECB’s policy meeting due Thursday. Markets have now once again built up the belief that the ECB will specifically comment on the strength of the euro and thus the knock on impact or restrictions this could place on potential growth and thus the potential for the ECB to taper their asset purchases. Quite simply if the ECB do not comment on the strength of the euro then there is scope for another leg higher in euro pairs. Throughout summer we have seen euro pairs advance over 10% as markets have been waiting on final details of tapering from the ECB, and whether or not they will extend purchases into 2018. At this point tapering is almost taken for granted, markets expect the ECB to scale purchases back to €40bln per month into 2018, however the duration of this extended program will be the deciding factor on where the euro goes next. EURUSD has major sellers towards highs above 1.2000, ahead of their resistance around 1.1980 and 1.1920 area needs to break. Downside support around 1.1815/25 area, while 1.1675 is the bull/bear line for me, a drop below there and we will see a larger euro correction. EURGBP is in a tighter range, .9270/.9300 zone offers major resistance to moves higher, light support at .9150/55 marks last week’s lows.
It’s been quiet for the UK in recent weeks but today’s services and composite PMI readings may offer some direction for the pound. Unfortunately both readings are expected to have declined slightly which will likely only weigh but larger ranges are the key for sterling. Later in the day as the US return from their long weekend we can expect Durable Goods orders and Factory orders, as well as some Fed speak from Brainard who speaks on economic outlook and monetary policy. Certainly enough fundamental data for us to get our teeth into, but for GBPUSD the larger range remains key with sellers around the top of the range towards 1.3000, while GBP buyers are active below 1.2800 to 1.2775 area.