Sunrise Market Commentary
- Rates: Risk sentiment key, but FOMC can keep investors at bay
Today’s eco calendar is empty. Risk sentiment could be key for trading, especially if European stocks pick up signals from WS. A correction lower is positive for core bonds via safe haven flows, but we don’t expect big moves ahead of Wednesday’s FOMC meeting. - Currencies: Tentative USD rebound slows as tech stocks fall off a cliff
On Friday, the dollar failed to maintain cautious intraday gains as US tech stocks nosedived later in the session. This morning, the euro doesn’t profit from the Macron victory in France. A negative risk sentiment might be negative for USD/JPY, but neutral for EUR/USD as investors look forward to the Fed policy’s decision on Wednesday
The Sunrise Headlines
- Nasdaq was hard hit on Friday (-1.8%) as heavy profit taking in the hugely overbought tech universe took place. Other US markets closed little changed. Asian equities are mostly lower (till about 1.2%) with a few positive outsiders.
- En Marche!, the party of president Macron is on track for a sweeping majority in the National Assembly. The party got 31.5% of the votes in the 1st round which should lead to a huge/absolute majority in the 2nd round a.
- UK PM May’s office backtracked on a statement that a deal was reached with the Democratic Unionist Party (N-Ir), adding to a sense of chaos around her government after last week’s disastrous election, and 8 days before Brexit talks.
- PM May could face a leadership challenge as soon as Tuesday if she fails to rally a meeting of her lawmakers that day, while five cabinet ministers are urging Johnson to oust her, the Sunday Times reported.
- Moody’s downgraded South Africa’s rating from Baa2 to Baa3, negative outlook, citing weakening of the institutional framework, reduced growth prospects and continued erosion of fiscal strength. It is now close to junk status, which is already the case at S&P and Fitch.
- The anti-establishment party Five Star Movement was brace for a setback in Italian municipal elections, as it failed to make run-off contests in many cities.
- Today’s eco calendar is empty. Attention goes to the results of the French parliamentary and Italian local elections, UK PM May’s struggle to safeguard her premiership and Friday’s sell-off in Nasdaq
Currencies: Tentative USD Rebound Slows As Tech Stocks Fall Off A Cliff
Dollar rebound slows at Tech stocks tumble
On Friday, the swings in the major cross rates, excluding sterling, were modest. In a session deprived of important eco data, the dollar initially continued Thursday’s gradual comeback. At the same time, Thursday’s cautious ECB approach capped the topside of the euro. Later in the session, the dollar returned most of the intra-day gains, partially driven by a correction of US Tech stocks. EUR/USD closed the session at 1.1195. USD/JPY touched an intraday top in the 110.81 area, but closed the day at 110.32.
Overnight, there is little high profile economic news. Most Asian equity markets are feeling some fall-out from the tech correction in the US on Friday. For now, the impact on the major FX cross rates is modest. USD/JPY hovers sideways in the lower half of the 110 big figure. In France, Macron succeeded a major victory in the first round of the French parliamentary elections and will secure a comfortable majority in the second round. At least on the Asian markets, the French election doesn’t support further euro gains. EUR/USD stabilises in the 1.1210 area.
There are no eco releases of interest. The political after-shocks from the UK election probably also won’t be important for the major euro and USD cross rates. The convincing Macron victory is/was a potential positive for French/European equities and for the euro. However, in Asia the focus is on the US tech correction and this might also be the case at the European opening. Investors will also look forward to the FOMC meeting (Wedn). At the end of last week, the dollar started a bottoming out process as event risks (Comey, UK election, ECB) were out of the way, but the USD momentum petered out late on Friday. More technical trading ahead of the Fed policy decision is likely. If the Tech correction would continue or spread to other markets, USD/JPY remains most vulnerable. The picture for EUR/USD is neutral going into the Fed policy decision. We still favour the view that further EUR/USD gains will be difficult if sentiment on risk turns outright negative (negative pressure from EUR/JPY).
Technical picture
The USD/JPY rally ran into resistance in early May. A mini sell-off pushed the pair below the previous top (112.20), making the short-term picture negative. The post-payrolls USD sell-off below 110 deteriorated the picture further. The pair declined further in the 108.13/114.37 range. At the end of last week the USD/JPY decline slowed, but there is no convincing sign of a U-turn yet.
Earlier in May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and US political upheaval propelled EUR/USD north of the 1.1023 range top. The pair initially reached a short-term correction top at 1.1268. There was a minor break after disappointing US payrolls, but no sustained followthrough gains occurred. The Trump top/correction top at 1.1300/1.1366 is next resistance. USD sentiment will have to be quite negative to clear this hurdle short-term. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: Off the recent highs, but no follow-through losses
EUR/GBP
Sterling sell-off slows, but uncertainty continues to weigh
On Friday morning, investors adapted positions as UK PM May’s conservative party lost its majority in Parliament. Sterling selling started in Asia as soon as it became clear that the UK was heading for a hung Parliament and reaccelerated early in Europe. EUR/GBP tested the 2017 top in the 0.8855 area. However, no sustained break occurred. On the contrary, the UK currency gradually found its composure and rebounded. Markets pondered whether the new political context could lead to a softer Brexit. Such a scenario could be less negative for sterling. The jury is still out on this issue as UK PM May wants to join forces with the Northern Ireland’s DUP. EUR/GBP closed the session at 0.8682. Cable finished the week at 1.2746.
There are a gain no important eco data in the UK today. The focus will be on the political scene. Today and tomorrow May will face plenty political opposition in her own conservative party. It’s unsure if this will lead to a resignation of May in the very short-term, but the pressure will remain. At the same time, there is a lot of speculation whether the new political context will lead to a softer Brexit. In theory this might be supportive/less negative for sterling, but it’s too early to play this card already. For now we assume that political risk will prevail and that there is no trigger for a sustained sterling rebound yet.
From a technical point of view, EUR/GBP broke above the 0.8774 resistance and tested the 0.8854 area(2017 top) on Friday. A real break didn’t occur. A retest of that area is possible. A break beyond would open the way to the 0.90 area. A return below the 0.8655 correction low would be an indication that the pressure on, sterling is easing
EUR/GBP: first test of 2017 top rejected, but sterling remains in the defensive
