Sunrise Market Commentary
- Rates: Potential trend reversal signal?
Today’s eco calendar is interesting. German inflation readings and the ADP employment report will get most attention from a market point-of-view. US yields show potential trend reversal signals (while simultaneously testing key support!). This would be especially valid if disappointing data fail to initiate a new bond rally. - Currencies: Dollar decline shows tentative signs of slowing down
Yesterday, the dollar rebounded impressively intraday after an initial sell-off. USD/JPY, the trade-weighted dollar and USD/JPY show trend reversal signals. Will the USD decline take a breather? The EUR/GBP rally also looks like running into resistance.
The Sunrise Headlines
- US equities ended with small gains yesterday, recovering from early weakness on the back of European risk aversion (North Korea-linked). Overnight, Asian stock markets paint a similar picture as WS.
- Flooding from Tropical Storm Harvey has shut nearly a fifth of US oil-refining capacity, triggering worries about a gasoline supply crunch as the slow-moving tempest lumbers through the heart of America’s petrochemicals industry.
- The UN strongly condemned North Korea’s launch of a ballistic missile over Japan, calling the actions "outrageous,". They didn’t discuss new sanctions. The US and Japan sought an oil embargo on Pyongyang, but China resisted.
- US consumer confidence ticked higher in August (from 120 to 122.9) and remains near its multiyear high. Both the sub-indices, present situation and expectations, improved.
- Growth in Japan’s retail sales moderated in July – but less than had been expected after an earlier reading for household consumption in July fell into unexpected contraction. Retail sales rose 1.9% Y/Y.
- The Czech central bank may debate tightening monetary policy at any upcoming policy meeting, Vice-Governor Hampl said in an interview, and he might vote to raise interest rates as early as the next meeting, in September.
- Today’s eco calendar heats up with EC EMU confidence indicators, German inflation, the US ADP employment report and the second reading of Q2 GDP. The Italian debt agency auctions BTP’s and Fed Powell is scheduled to speak
Currencies: Dollar Decline Shows Tentative Signs Of Slowing Down
Dollar succeeds nice intraday comeback
Yesterday, geopolitical uncertainty on north Korea and the potential negative impact of hurricane Harvey initially installed an outright risk-off sentiment in European trading. The yen, the CHF and the euro were the safe haven currencies. EUR/USD cleared the 1.20 mark. USD/JPY came within reach of the 1.0813 key support. However, equities and the dollar rebounded in US trading. The comeback was supported by a good US consumer confidence. EUR/USD finished a volatile session at 1.1972 (from 1.1979). USD/JPY more than reversed the initial setback and closed at 109.71.
Overnight, Asian equity markets show gains of about 0.5% as uncertainty on North Korea subsides. Japanese retail sales were strong, but as usual had little impact on the yen. USD/JPY holds in the upper half of the 109 big figure as a better global sentiment supports the dollar across the board. EUR/USD stabilizes in the 1.1975 area. The Aussie dollar rebounded close to the AUD/USD 0.80 barrier after strong construction data.
Today, the eco calendar contains German inflation and the confidence data of the EC. In the US the APD labour market report and the second reading of the US GDP will be published. EC confidence is expected to confirm recent strong national reports. German HICP inflation is expected to rise 0.1% M/M to be up 1.7% Y/Y (from 1.5% Y/Y in July). A rise in German headline inflation might be slightly supportive for the euro. ADP private job growth is expected at a solid 185K. We side with the consensus. In globo, the data might be slightly more in favour of the euro than the dollar. However, global sentiment will be at least as important as the data. If sentiment on risk improves further and if core/US yields rebound, the dollar might get some further relief. The jury is still out, but USD/JPY, the tradeweighted dollar, EUR/USD and the 10-y US yield yesterday showed some trend reversal signals. The US payrolls (and wage data) on Friday, will be key about the room for a sustained USD rebound. Given today’s calendar (e.g. higher German inflation), it would already be constructive signal for the dollar if it maintains yesterday’s intraday rebound (against the euro).
Broader context and technical picture. Late June, EUR/USD started a new up-leg as investors anticipated a reduction of ECB bond buying. The Fed was expected to normalize policy only in a very gradual way as US inflation remains soft. Uncertainty on the policy of the Trump administration was a 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 range. The top of this range was broken after Jackson hole and EUR/USD jumped (temporary) above 1.20, but couldn’t maintain this break. Sentiment on the dollar remains fragile, but there are signs of a EUR/USD topping out. Strong key US data later this week need to confirm these. In MT perspective, the EUR/USD rally might have gone far enough. 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. We wait for a technical signal. A downward correction in core (US and European) yields supported the yen in August. USD/JPY declined from mid-114 mid-July and came within reach of the key 108.13 range bottom yesterday, but the support did its job. We maintain the working hypothesis that this level won’t be easy to break as a lot USD bad news is discounted. A cautious buy-on-dips (with stop-loss protection below 108) may be considered.
EUR/USD fails to sustained break north of 1.20. Is the rally a bit exhausted?
EUR/GBP
EUR/GBP: test of +0.93 rejected?
Sterling trading was both affected by technical/global market considerations and by fundamental issues yesterday. Regarding the ‘fundamentals’: the third stage in the Brexit-negotiations between the EU and the UK still look like a dead end street. EU commission President Juncker simply earmarked the UK’s position papers as not satisfactory. Initially USD weakness prevailed though, pushing cable temporary to the 1.2975/80 area. At the same time, the Brexit noise clearly caused a substantial underperformance of cable versus EUR/USD. EUR/GBP jumped temporary north of 0.93. However, later in the session, EUR/USD reversed the euro losses and so did EUR/GBP. The pair closed the session at 0.9267.
UK July money supply and lending data will be published today. We expect them to be only of intraday significance for sterling trading. The stalemate in the Brexit negotiations is no help for sterling, but should be more or less discounted. Global factors might dominated sterling trading. An extension of EUR/USD’s correction and improvement in risk sentiment, might also trigger a corrective comeback of sterling against the euro. As is the case for EUR/USD, EUR/GBP also shows some doji-like topping out signal yesterday.
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. Simultaneously, UK price data were soft enough to keep the BoE sidelined. MT, we maintain a buy EUR/GBP on dips approach as we expect the combination of relative euro strength and sterling softness to persist. The 0.9415 ‘flash-crash spike’ is the next target on the charts. However, we don’t jump on the up-trend anymore after the recent rally and wait for a correction, e.g. to the technical support in the 0.88/89 area
EUR/GBP: rally to take a breather?
