KBC Sunrise Market Commentary: Slow start to the new week

The currency trading took a slow start to the new week. The EUR/USD pair wasparalyzed in a very tight range between 1.2560 and 1.2510. European equity marketsdidn’t know which way to go after Friday’s disappointing US payrolls report and thenews flow was unable to steer the currency market. So, there was absolutely no storyto tell on EUR/USD trading. The same was true for USD/JPY trading as the pair waslocked in a sideways range roughly between 88.00 and 87.65. Nevertheless, the picturefor this pair continued to look heavy, but also here there was no incentive formarkets to push for a retest of the 86.95 year low.

The UK was one of the few countries with market relevant data on the agenda. TheUK PMI for the manufacturing sector dropped from 55.4 to 54.4, versus a consensusestimate of 55.00. We don’t consider this high profile news, but in a thin market itcaused sterling to cede further ground, both against the euro and the dollar. The pairset an interim high at 0.8285-area. The British Finance Ministry announced the appointmentof Martin Weale as a member of the BoE’s Monetary Policy Committee.Weale will take up its position in time for the bank’s August rate setting meeting.There were a lot of recent quotes from Weale in the media, but in those comments hekept a balanced approach offering no clear input for sterling trading. Nevertheless,has appointment didn’t help sterling either as the UK currency stayed in the defensivethroughout the session. The pair came close to the post-payrolls’ high, but a break ofthe 0.8300 mark didn’t occur. EUR/GBP closed the session at 0.8283, compared to0.8269 on Friday evening.

This morning, both equity markets and currency markets show somewhat of a mixedpicture. Asian equity indices opened in negative territory. This dragged also the riskcrosses (the likes of EUR/USD, USD/JPY, EURJPY and AUD/USD) lower, but theearly losses are already reversed. Japanese policy makers repeated that they wereclosely monitoring the moves in stock and equity markets, but we doubt it has beenthe trigger for the reversal on Asian equity and currency markets.

Today in the FX markets, the global calendar is again thin (see below). Markets willlook out for the ISM non-manufacturing for confirmation US growth is slowing. In linewith the price action at the end of last week, we assume that a weak figure will be(moderately) negative for the dollar. However, we suspect that dollar losses beyondthe key technical levels (1.2673 in EUR/USD and 86.97 in USD/JPY) will bedifficult. We also keep an eye on the recent narrowing of the gap between US andGerman bond yields as this was part of the explanation of the outperformance of theeuro of late. German bunds had a strong run yesterday. If this would indicate that thenarrowing of the yield gap will slow, it could also slow/cap the rebound of the euroagainst the dollar. In the UK, a BCC survey published overnight pointed to stronggrowth in the second quarter, but the organization warned for tougher times ahead.The impact on sterling trading was limited though. EUR/GBP tracked the Asianswings of EUR/USD. In a day-to-day perspective, we have the impression that therebound of EUR/GBP is slowing. So, the 0.8300 mark is a first point of reference.In a longer term perspective, a sustained rebound north of the 0.8428/43 breakdownarea won’t be easy.

Today, the market calendar remains wafer thin. In the US, the NonmanufacturingISM is expected to show a slight slowing in momentum with the headline index downto 55 in June from 55.4 previously. Following the disappointing manufacturing ISM releaselast Thursday, the risks are firmly on the downside of expectations and if thiswould be the case, fears for a more pronounced cooling of growth would be confirmed.There are no other data releases scheduled. Regarding fresh supply, Austriareopens on Tuesday its 3.5% July 2015 and its 3.9% July 2020 AGB’s for anamount of €0.65B each. The issue should go well, also because a huge redemptionof German Bunds is scheduled, while the only other issuance this week is a reopeningof the July 2020 Bund (€5B).