Sunrise Market Commentary
- Rates: Slow start to trading week, with wildcard Dudley
Today’s eco calendar is empty suggesting low volume neutral trading in tight ranges. Fed governor Dudley speaks and is a wildcard for dealings. Dudley is a bellwether and close ally to Fed chairwoman Yellen. US yields (10y, 30y) remain close to key support levels, even as the Fed held on to the blueprint of its future tightening cycle last week. - Currencies: USD looking for new impetus as post-Fed rebound stalls
On Friday, the dollar returned part of its post-Fed gains as US eco data disappointed. The dollar needs strong eco data or positive Fed comments to regain more ground. These factors probably won’t be available today. Sterling hovers off the recent lows as the Brexit negotiations formally start.
The Sunrise Headlines
- Asian stocks rose on Monday, shaking off Wall Street’s uninspiring performance on Friday. The yen slumped against all its major peers. Oil continued to retreat, trading near the lowest level since November.
- Macron’s party won an absolute parliamentary majority in France (likely 350 out of 577 seats). Macron’s majority gives him a free hand to push through his program of liberalizing France’s labour market closer European integration.
- Fitch confirmed the Portuguese BB+ rating, but raised its outlook to positive from stable, giving the country the perspective to regain its investment grade status that it lost in 2011. Positive fiscal developments supported the decision.
- Fed Kashkari explained his dissenting vote at the FOMC meeting. He stressed the lower core inflation readings and inflation expectations and preferred the risk of not raising rates too soon, as lower core inflation might not be transitory.
- Fed Kaplan, voter & firmly in moderate camp, said the Fed must be cautious and patient in raising rates further. He wants to see more progress on achieving the 2% target and wants more evidence of that before taking the next step. This suggests there is doubt within the Fed on the timing of the next move.
- Rumours suggest pressure on PM May within her own party has increased as constituency party bosses, especially remain-voters, have called on ministers and MPs to force May from power through a no-confidence vote..
- The eco-calendar is wafer-thin today with the only event of significance being the Business Roundtable of NY Fed president Dudley
Currencies: USD Looking For New Impetus As Post-Fed Rebound Stalls
USD rally hesitates
On Friday, EUR/USD reversed part of Thursday post-Fed decline as the two day global dollar rebound stopped. Poor US housing data and weaker than expected US consumer confidence hit the dollar. USD/JPY was initially better supported by a constructive equity sentiment, but the momentum also eased later on. EUR/USD closed the session at 1.1198. USD/JPY finished the week at 110.88.
Overnight, Asian equities show moderate gains between. The Japanese trade surplus narrowed more than expected, but it was due to a sharp rise in both imports (17.8% Y/Y) and exports (14.9%). The report is an indication of better domestic demand. However, the impact on the yen is limited. USD/JPY trades in the 111 area. The kiwi dollar extended its recent rebound on better than expected consumer confidence and improvement in the services sector. NZD/USD trades in the 0.7280 area. For now, the positive risk sentiment is barely helping the dollar. EUR/USD is changing hands close to 1.12.
There are no data with market moving potential today. Political events, technical considerations and global risk sentiment on will have to guide USD trading. The party of the French president Macron secured a solid majority. Sentiment on risk is constructive at the start of the new trading week. The tech correction that weighed on global equities last week is apparently easing. Is this set-up enough to support a USD rebound? First indications from Asian show no rush to buy the dollar.
After last week’s relative hawkish Fed statement, the topside in EUR/USD looked better protected and a cautious sell-on upticks approach was advised. We hold on to that view. However, sustained USD gains need better US eco data, supportive Fed comments and/or higher US yields. It’s unlikely to happen today. An equity comeback might be slightly USD supportive, but we don’t expect big USD progress. in this respect we keep a close eye on USD/JPY. Recently the USD/JPY performance was mediocre even as several equity indices are trading near record levels.
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 and driving the pair further down in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair beyond a first minor resistance at 110.81. However, there are still no follow-through gains. If the break higher is confirmed, it suggests that the USD/JPY downside momentum is easing. For now, were remain cautious to forecast a U-turn.
Early 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 to a corrective top in the 1.12 area. The pair tested the 1.1300 area going into the FOMC decision, but the test is rejected. So the Trump top/correction top at 1.1300/1.1366 proved to be a solid resistance. USD sentiment will have to become very negative to clear this hurdle. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: test off 1.1300/66 resistance rejected, but correction remains limited for now
EUR/GBP
Sterling off recent lows as Brexit-talks start
On Friday, sterling entered calmer waters, as . However, there was no followthrough sterling buying after Thursday’s BoE vote. EUR/GBP rebounded slightly off the correction low (0.8720 area), but this move mostly mirrored a modest rebound of the euro after yesterday’s EUR/USD decline. The pair closed the session at 0.8760. Cable also gained a few ticks and finished the week at 1.2783.
Overnight, Rightmove House prices declined more than expected at -0.4% M/M and + 1.8% Y/Y. The focus for sterling trading will remain on the political scene. PM May still tries to find support for a minority government, while at the same time, the official Brexit talks will start. There is growing support even from a part of May’s party for a softer Brexit. That should be sterling supportive, but it contains the risk of more division in the conservative party and thus global UK political uncertainty. We don’t bet on a sustained sterling rebound as long as political uncertainty remains as high as it is.
From a technical point of view, EUR/GBP extensively tested the 0.8854 area (2017 top), but a real break didn’t occur. Some consolidation might be on the cards after last week’s post BoE EUR/GBP correction. However, the broader technical picture hasn’t changed. A return below the 0.8655 correction low would be an indication that the pressure on sterling is easing. Such a break will be difficult. A EUR/GBP buy-on-dips approach is still favoured
EUR/GBP shows no clear trend as Brexit negotiations formally start
