Sunrise Market Commentary
- Rates: Positive bias core bonds ahead of Yellen/Draghi
We forecast trading to remain sentiment-driven ahead of speeches by ECB Draghi (tomorrow and Friday after close) and Yellen (Friday). Current market sentiment underpins core bonds as subdued inflation readings dealt a blow to tightening expectations while turmoil in Washington sparked some volatility on Wall Street. - Currencies: dollar holding within reach of recent lows
The dollar continues to trade soft, but nearby technical support levels are left intact as investors await CB speeches at the Jackson hole Fed symposium. Today’s data won’t change the global dollar picture. EUR/GBP extends its impressive rebound as investors look forward to the next round of Brexit negotiations
The Sunrise Headlines
- US equities ended little changed with energy (lower oil prices) and financials lagging and real estate outperforming. Asian equities started the day on a stronger footing (good corporate results) and US equity futures show gains too.
- Britain will be subject to the rulings of European courts after Brexit, the government has conceded, in an apparent climb-down from its promise of judicial independence, said the Guardian.
- President Trump made an open-ended commitment to Afghanistan that’ll add as many as 4,000 more US troops into the country and keep American forces there as long as it takes to ensure a stable and enduring peace.
- Oil prices dropped sharply yesterday to €51.66/barrel, reversing Friday’s gains. OPEC’s Vienna meeting ended quietly without decision on the future of supply cuts. The cartel will discuss whether to extend or end the deal in November.
- The Hungarian central bank meets, but consensus unanimously expect an unchanged decision (base rate of 0.9%). The forint performed well recently and approaches the EUR/HUF 300 threshold (now 303.29).
- Today’s calendar remains light with the August German ZEW economic sentiment and the US Richmond Fed manufacturing surveys. In the UK, public finances (July) and the CBI trends report are up for release. ECB Constancio speaks.
Currencies: Dollar Holding Within Reach Of Recent Lows
Dollar holding near the recent lows
EUR/USD held within reach of the early August top in recent weeks, but no new test occurred. This indecisive pattern continued yesterday. The dollar traded with a slightly negative intraday bias, partially due to a negative risk sentiment. EUR/USD drifted back north of 1.18 and closed the session at 1.1815. Investors awaited speeches of Fed’s Yellen and ECB’s Draghi at the Jackson Hole Fed symposium on Friday. USD/JPY drifted temporary below 109, but rebounded to the 109 area as risk sentiment improved later in US dealing.
Overnight, Asian equities show moderate gains, but volumes are low as there is no high profile (economic) news. The yen eases slightly. USD/JPY tries to find a bottom after a protracted decline throughout August. EUR/USD hovers near 1.18.
In EMU, the German August ZEW economic sentiment is expected to decline slightly. The current situation sub-index peaked in June (88). The expectations’ component hovered sideways of late . A strong decline of the expectations would signal that the economy is rolling over, which we don’t expect. The August Richmond Fed manufacturing index is expected to have declined to 10 from 14. Other recent surveys suggested that manufacturing is doing well. With a weaker dollar and signs of better domestic demand, we count on a stabilization of the Richmond Fed. The index is volatile and sharply surprised on the upside in July. The impact on USD trading should be limited. At the margin, the data might be slightly USD supportive, or at least slow the USD decline. The global equity performance remains a wildcard for USD trading. An easing of recent equity softness might be marginally USD supportive. Focus remains on the speeches of Yellen and Draghi later this week.
Broader context and technical picture. Late June, EUR/USD started a new upleg as investors anticipated a reduction of ECB bond buying to be announced in autumn. The Fed was expected to remove policy stimulation only in a very gradual way as US inflation remained soft. Uncertainty on the policy of the Trump administration was an secondary negative factor for the dollar. EUR/USD set a new correction top north of 1.19 before consolidating in a narrow 1.1662/1.1910 trading range. We expect this range will hold going into the Jackson Hole symposium. If US data remain ok (as most were this month) and if Draghi gives little information on next ECB steps, there might be room for a modest USD comeback. A return of EUR/USD to the 1.15/16 area is possible. Pockets of US political risk are a (negative) wildcard for the dollar.
A downward correction in core (US and European) yields supported the yen in August. USD/JPY declined from the mid 114 area mid-July to 108.60 last Friday. The April correction low (108.13) remains the key line in the sand. For now, this level won’t be easy to break as quite some USD bad news is discounted after the recent protracted setback. A cautious buy-on-dips approach (with stop-loss protection below 108) may be considered
EUR/USD correction top stays within reach
EUR/GBP
EUR/GBP extends protracted uptrend
Yesterday, the gradual, but protracted EUR/GBP uptrend continued. Investors awaited new info on the Brexit negotiations going into a next round of formal talks next week. There were no UK eco data. In technical trading, EUR/GBP closed the session at 0.9162. Cable held an extremely tight sideways range in the upper half of 1.28/low 1.29. USD softness helped sterling.
Today, the UK monthly public finance data and the CBI trends orders data will be published. The data are usually only of second tier importance for sterling trading. The CBI orders are expected marginally softer at 8 from 10. Recent UK eco data were not too bad even as higher inflation is eroding Britons capacity to spend. The difficult Brexit talks remain a negative sterling factor MT. However, the recent rise of EUR/GBP has gone quite far and the pair is moving into overbought territory. So, we look for a correction, for whatever reason (correction in EUR/USD, decent UK eco data, improving global risk sentiment…).
From a technical point of view, EUR/GBP cleared the 0.8854/80 resistance (top end June), opening the way for further gains The move was the result of euro strength (ongoing strong EMU growth and expectations of the ECB reducing policy stimulation later this year). At the same time, UK price data remain soft enough for the BoE to keep a wait-and-see modus as the Brexit negotiations continue. MT, we maintain a buy EUR/GBP on dips approach as we expect the constellation of relative euro strength and sterling softness to continue. The 0.9415 flash-crash spike is the next MT target on the charts. However, we don’t jump on the trend anymore after recent protracted EUR/GBP rally and wait for a correction, e.g to the technical support in the 0.88/89 area.
EUR/GBP: consolidation near recent top
