14/10/2014: Dollar back with a bang as European data disappoints

The way that the dollar had strengthened from very early in the European trading session, suggested that the market was very concerned by both the UK CPI and also the German ZEW Economic Sentiment. That concern was proved to be justified as we have seen well over 100 pips lost on both EUR/USD and GBP/USD.

Sterling is under massive pressure after UK CPI inflation dropped by 0.3% in September to 1.2%. This is well below the Bank of England’s target rate of 2.0%. The data surely now puts to be the argument of a rate hike by the Monetary Policy Committee (this should be confirmed tomorrow is the wage growth remains subdued in tomorrow’s unemployment statistics).The doves on the MPC (who have a 7:2 majority) have virtually no excuse to change stance now. This is resulting in interest rate futures being pushed further back. The prospect of a Q1 rate hike is rapidly disappearing, with the market now pricing in June 2015 at the earliest.

German ZEW Economic Sentiment is a very good gauge for German GDP and that has got traders concerned. The data has fallen every month this year (and also missed expectations on every month bar one). The reading of -3.6 (1.0 had been expected) has continued this trend and suggests that Germany looks to have moved into recession in Q3 (after a -0.2% reading for GDP in Q2).

G ZEW   14102014

The data has also driven demand for safe haven trades. The biggest move of the day has been in Treasuries with the significant shallowing of the US yield curve continuing at a pace. The demand for longer dated Treasuries suggests concerns over future growth prospects and this has seen the 10 year yield dip to the lowest since June 2013. The chart below shows the US yield curve today (gold), versus 1 month ago (purple) and 3 months ago (green). This is a feature across the board, with longer dated UK Gilts and German Bunds also in demand.

US YC   14102014

Sterling/Dollar has fallen now 140 pips on the day and is breaking the key reaction low at $1.5941. A confirmed breach would open downside towards the November 2013 low at $1.5850. Euro/Dollar is also under huge pressure, dropping 100 pips on the day. The volatility of the past few days has been high, however there is still a support around $1.2600 intact, whilst the Euro equivalent of $1.5941 on Cable is at $ 1.2500. The Euro outperformance of Sterling continues.

However the greenback has not had it all its own way this morning, with the Japanese yen regaining ground after earlier dollar strength. With the yen having weakened to as high as 107.31 on Dollar/Yen the rate has pulled sharply lower and is now looking to challenge the overnight low at 106.73. The intraday hourly downtrend continues to show lower highs and further corrective forces on Dollar/Yen. A break below 106.73 would open 106.00 (which is also the implied target from the top pattern). My medium term buy signal is no closer in coming through, so I will have to wait for now.

USDJPY   14102014

 

 

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