EUR/USD Rally Pauses For Air Ahead Of ECB

Bulls probably feeling a bit exposed as EUR/USD consolidates after teasing above first resistance levels. We could see more nervous trading in the coming days through next Wednesday’s FOMC meeting.

Confusing signals out of China and Australia
Overnight, we had a drop in the HSBC Services PMI survey to a meager 52.1 vs. the 53.5 expected, dampening the hopes that the Chinese economy is gaining momentum. But at the same time, we saw a tremendous rally in Chinese equities, with the Shanghai composite closing about 3% higher, one supposes on renewed hopes that China is ready to let the stimulus flow, but I was unable to locate a credible catalyst – but certainly a move worth noting.

The aussie didn’t respond much either way, as we also saw slightly weaker Q3 GDP growth than expected, but a far better, if still tepid, services survey for November. AUD/USD is treading water just below the 1.0500 area which is clearly a bit of a psychological hurdle if we look back over the last couple of weeks of action. The Australian November employment report tonight is the next key event risk.

European services surveys
The final version of the German and Euro-wide services survey was marginally better than the preliminary reading, but Italy’s survey fell rather than improving. Spain’s improved slightly, though it was still at a very weak 42.4 in November. The UK services PMI was slightly lower, but still hovering just above the 50 level, while Sweden’s survey dropped sharply to 46.4, it’s lowest reading since back in 2009. Swedish data has been much worse than expected for two months now as EURSEK continues to mull whether it should have a peek above the 200-day moving average

Looking ahead
All eyes will be on the ADP employment change number at 1315 GMT and then the US Nov. ISM non-manufacturing survey later at 1500 GMT.

Technically, the focus is on the 1.3170 top in EURUSD to see if it can provide any resistance to the euro rally. Meanwhile, on the general risk appetite front, we have the German DAX trading up near highs for the year and therefore within a couple of percent of the post-Lehman highs as well. The complacency is remarkable, given the economic backdrop – you would think a massive economic growth and profits surge is just around the corner. EUR/GBP is also up near the highs for the cycle.

Chart: EUR/USD
Late yesterday and overnight, we had a peek above the gently descending trendline from the previous high points, but bulls are perhaps feeling a bit exposed in the near-term with the pipeline of event risks on the way through next Wednesday’s FOMC meeting, hence today’s consolidation. Minor support comes in at day pivots in the 1.3075-85 area ahead of the key 1.30 psychological support.

Tomorrow we have the ECB meeting, with perhaps an under-recognized risk of a 25-bp rate cut. The knee-jerk reaction would be for the euro crosses to consolidate further in such an event to a degree, but tail risks are still the predominant focus for the moment, so if spreads come in sharply, the euro could quickly find support – of course, both widening spreads and a rate cut could see a more vociferous reversal of the recent EUR strength.

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Finally – just noting that 10-year JGB’s are trading at the lowest yield yet for the cycle at a mere 70 basis points – that’s supportive of the weak JPY story if risk appetite remains otherwise on, but certainly doesn’t fit well with the supposed threat of a massive JPY devaluation that is supposed to arrive with a Shinzo Abe government next year.

Note the RBNZ official cash rate announcement up before the US session even ends today – no expectations surrounding this meeting, but new guidance could move the kiwi.

Economic Data Highlights

• Australia November AiG Performance of Services Index out at 47.1 vs. 42.8 in October
• UK November BRC Shop Price Index out at +1.5% YoY vs. +1.5% in October
• Australia Q3 GDP out at +0.5% QoQ and +3.1% YoY vs. +0.6%/+3.1% expected, respectively and vs. +3.8% YoY in Q2.
• China November HSBC Services PMI out at 52.1 vs. 53.5 in October
• Sweden November Services PMI out at 46.4 vs. 50.2 in October
• Spain November Services PMI out at 42.4 vs. 41.0 expected and 41.2 in October
• Sweden October Service Production out at -1.1% MoM and -2.0% YoY vs. -0.5%/-0.1% expected, respectively and vs. -0.1% YoY in Sep.
• Italy November Services PMI out at 44.6 vs. 46.0 expected and 46.0 in October
• Germany November Final Services PMI out at 49.7 vs. 48.0 preliminary estimate and vs. 48.4 in October
• Eurozone November Final Services PMI out at 46.7 vs. 45.7 preliminary estimate and vs. 46.0 in October
• UK November Services PMI out at 50.2 vs. 51.0 expected and 50.6 in October
• Eurozone October Retail Sales out at -1.2% MoM and -3.6% YoY vs. -0.2%/-0.8% expected, respectively and vs. -1.6% YoY in Sep.

Upcoming Economic Calendar Highlights (all times GMT)

• US November ADP Employment Change (1315)
• US October Factory Orders (1500)
• US November ISM Non-manufacturing Survey (1500)
• US Weekly DoE Crude Oil and Product Inventories (1530)
• New Zealand RBNZ Official Cash Rate announcement (2000)
• Australia RBA’s Debelle to Speak (2300)
• Australia November Employment Change and Unemployment Rate (0030)

Written By: Saxo Bank