Sunrise Market Commentary
- Rates: Risk sentiment and oil prices key for trading
Today’s eco calendar is empty suggesting more low volume trading in tight ranges (both for the Bund and US Note future). There are no scheduled central bank speeches. Risk sentiment and oil prices could guide global trading. Core bonds can profit in a daily perspective if Europe copies yesterday’s correction lower on WS and oil extends losses. - Currencies: Dollar still looking for guidance. Sterling testing support
The moves in the dollar were limited yesterday as there were no important data or events. Today’s trading pattern might be similar. Sterling reversed the post-BoE rebound on soft Carney comments. Political uncertainty might push EUR/GBP for a test of 0.8854/66 resistance.
The Sunrise Headlines
- Asian stocks weakened after their US peers pulled back from record highs and the oil price fell to a seven month-low. Chinese stocks were the only exception as MSCI decided to add some Mainland A-shares to its global benchmark equity index. Chinese indices reacted by going slightly higher.
- Italy’s 5-star movement is trying to shed its Eurosceptic image and called the bid for a euro referendum a “plan B”, only to be executed if negotiations on reforming the euro area are unfruitful.
- Intesa Sanpaolo is in talks with Italy’s government and EU regulators about taking control of the good assets of two struggling banks as Italy seeks to head off a renewal of concerns about the solidity of its banking system.
- Angela Merkel says she is open to the idea of giving the eurozone a single finance minister and a common budget, offering conditional support to one of French President Emmanuel Macron’s signature policies.
- With no deal in sight between the Conservatives and the DUP party, the government will likely present its legislative programme with no guaranteed majority today for the Queen’s speech. The speech votes are planned for the 28th and 29th.
- The only significant items on the eco-calendar are the Queen’s speech in the UK, existing home sales in the US, the BoJ Kuroda speech in Tokyo and the sale of German bonds (30-yr).
Currencies: Dollar Still Looking For Guidance. Sterling Testing Support
USD is still looking for guidance
With no important eco data on the agenda, major dollar cross rates traded again uneventful. EUR/USD hovered mostly slightly north of 1.1150, but lost a few ticks later in the session. USD/JPY touched a short-term top in the 111.75/80 area, but reversed earlier gains as core yields and equities declined. EUR/USD finished at 1.1134 (from 1.1149). USD/JPY closed at 111.45 (from 111.53).
Overnight, Asian equities lose ground (0.5%), but less than Wall Street yesterday, which is good. Chinese equities outperform slightly after their inclusion in the MSCI benchmark indices. Oil ($46 p/b for Brent) struggles to prevent further losses, but has currently no direct link with USD trading. USD/JPY is losing a few ticks on the modest risk-off sentiment, currently trading in the 111.30/35 area. EUR/USD is unchanged (1.1135).
The eco calendar remains unattractive today. In the US, existing homes sales and mortgage applications will be published. Housing data are seldom a mover for USD trading. However, of late housing data showed a loss of momentum. Another negative surprise might be slightly negative for the dollar intraday. Technical considerations and equity sentiment will again dominate EUR/USD and USD/JPY trading. Asian equities and the US futures suggest a modest risk-off sentiment. This might be mildly negative for USD/JPY. We take a neutral stance on EUR/USD trading. Yesterday, the pair maintained a cautious negative bias even as sentiment on risk deteriorated throughout the day and yield spreads narrowed. Apparently, the market is still positioned a bit EUR/USD long. Will the pair go for a test of the 1.1110 correction low?
Global context. After last week’s relatively hawkish Fed statement, the topside in EUR/USD is better protected and a cautious sell-on upticks approach is advised. However, sustained USD gains need better US eco data, supportive Fed comments and/or higher US yields. With few high profile US data this week, it is doubtful that the US currency will receive this support. If the equity rally slows, so might be the USD rebound
Technical picture
The USD/JPY rally ran into resistance in early May. A mini sell-off mid-May made the short-term picture negative, 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. A break beyond the 112.13 correction top would improve the ST-picture. The day-to-day sentiment improved slightly of late, but we 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. The pair tested the 1.1300 area going into the FOMC decision, but the test was rejected. So the Trump top/correction top at 1.1300/1.1366 proved to be a solid resistance. USD sentiment will have to become really negative to clear this hurdle. EUR/USD 1.1110 is a first minor support. 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 modest. First support at 1.1110 within reach
EUR/GBP
EUR/GBP nears recent highs on soft Carney comments
Last week, markets were spooked by an unexpected MPC vote as thee members voted to raise rates to keep inflation in check. Yesterday, BoE governor Carney played another card: ‘Given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment (a rate hike)’. UK bond yields and sterling nosedived. EUR/GBP rebounded north of 0.88. Cable dropped well below the 1.27 barrier.
The UK public finance data will be published today, but the focus will remain on the political scene. The Queen will give her opening speech for the new parliament. However, it is not sure yet that the policy statement can be approved by a political majority as the negotiations between the Conservatives and the DUP are ongoing. The speech as such might not be a big issue for markets, but it illustrates the precarious political situation in the UK. In the wake of yesterday’s soft Carney comments, we expect today’s context to remain sterling negative.
From a technical point of view, EUR/GBP extensively tested the 0.8854 area (2017 top), but a real break didn’t occur. The post-BoE correction halted yesterday. EUR/GBP trades again within reach of the 0.8854/66 resistance. A break would open the way to the 0.90 area. A return below the 0.8655 correction low would indicate easing pressure on sterling. Such a break lower will be difficult. A EUR/GBP buy-on-dips approach is still favoured.
EUR/GBP returns within reach of the 0.8854/66 resistance
