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EURGBP cross on the cusp of decline

Key FX market drivers:  

- Risk aversion amid renewed concerns about the potential contagion from China Evergrande's debt crisis.

- The UST10Y yield widened to 1.68%.

- The new German Chancellor is to be named after December 6.

- China Evergrande Group remitted USD-bond interest payment.

The EURUSD pair fell 0.24% to 1.1623 on Thursday, October 21. The US currency firmed across the board amid rising UST yields and risk aversion. The UST10Y yield bonds rose to 1.68%.

Traders bought into safe haven assets like the dollar and the yen amid concerns over Chinese property developer Evergrande due to the looming expiration of a 30-day grace period. The company’s $2.6 bln unit stake sale fell through. News also broke that the developer has been granted more than a three-month extension to the maturity of a $260-mln bond.

EURUSD pair dropped to 1.1620 by the close.

Today’s macro agenda (GMT 3)

  • 10:15 France: Markit services PMI flash (October)
  • 10:30 Germany: Markit manufacturing and service PMI flash (October)
  • 11:00 Eurozone: Markit manufacturing and service PMI flash (October)
  • 11:30 UK: Markit/CIPS manufacturing and service PMI flash (October)
  • 15:30 Canada: retail sales (August)
  • 16:45 US: Markit manufacturing and service PMI flash (October)
  • 17:00 US: San Francisco Fed President Mary Daly speech
  • 20:00 US: Baker Hughes weekly oil rig count

Current outlook

By the time of writing, major currencies were trading slightly higher, although the gains look tepid Today’s leaderboard is topped by the Antipodeans. Demand for risk-sensitive assets got a boost from news that China Evergrande Group narrowly dodged a default after paying a $83.5 mln offshore bond coupon before the 30-day grace period expires on October 23. The company has postponed the default, but the problem remains unresolved.

The media also wired that German parties expect to name the new Chancellor shortly after December 6. He will presumably be head of the Social Democrats and the current Finance Minister Olaf Scholz. The sooner there is clarity on this issue, the better it will be for the single currency.

Heading into the European trading session, overall risk sentiment will continue to be driven by Eurozone PMIs and the dynamics of UK, EU and US bond yields. PMIs also take front and center in today’s economic calendar.

Technical analysis

The euro is currently trading at $1.1643. Price action is located on the trendline and below the 55-day SMA. Until the trendline is broken, EURUSD should see gains in European trading. The overall picture on the FX market looks much like an extension of the dollar’s upward correction.

The DXY index, like the euro, is close to the trendline. All buyers need to do, in terms of DXY index future, is to apply some pressure and growth will pick up to 93.95 The macroeconomic slate shows nothing except PMIs. Market activity is expected to be brisk during the first half of the day. Then traders will again shift their focus to the North American stock market.

The EURGBP pair is trading above the 0.8420 support level and at any moment the price action could drop to 0.84. The S&P 500 is hovering near its recent ATH. Given the technical outlook for the cross, the S&P 500 and the UST10Y yield, we can see a V-shaped pattern shaping up for the euro today, consisting of a trough in the European session and a peak in the North American session. 

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