Sunrise Market Commentary
- Rates: Macron’s victory discounted?
Macron’s presidential election victory was largely discounted in markets and could trigger some buy-the-rumour, sell-the-fact reaction amid today’s uneventful eco calendar. Afterwards, bond markets might start positioning towards key, hawkish (?) June ECB and Fed policy meetings, which is negative for the Bund and the US Note future. - Currencies: EUR/USD tests 1.10. Post-Macron consolidation might be on the cards
This morning, EUR/USD and USD/JPY jumped temporary higher on the Macron victory in the French Presidential election. However, European markets already largely anticipated this victory last week. So, if the risk-on rally takes a breather, the recent rebound of USD/JPY and EUR/USD might also shift into a lower gear.
The Sunrise Headlines
- US equity markets ended 0.25% to 0.5% higher with the S&P setting an all-time closing high. Overnight, Asian bourses gain as well with China underperforming (-1%) and Japan outperforming (+2%), catching up after last week’s holidays.
- Macron has swept to emphatic victory in France’s presidential election, beating Le Pen and clinching 65% of the vote. Mr Macron has never before held elected office and his political movement En Marche! was set up barely a year ago.
- China’s exports and imports rose in April, but missed analysts’ expectations, as domestic and foreign demand faltered and commodity prices fell. China’s FX reserves rose in April for a third straight month as capital controls and a pause in the dollar’s rally helped staunch capital outflows.
- SF Fed Williams said his outlook for three or four rate increases in 2017 hasn’t shifted, as the labour market shows signs of expanding beyond its sustainable rate.
- German Chancellor Merkel’s Christian Democrats gained a surprise victory in the north German region of Schleswig-Holstein, giving them a boost ahead of September’s national Bundestag vote.
- British consumer spending growth slowed to one of its weakest rates in the past three years last month, credit and debit card company Visa reported, as higher inflation and weak wage growth squeeze households’ disposable income.
- Today’s eco calendar contains only second tier data. Fed governors Bullard and Mester are scheduled to speak.
Currencies: EUR/USD Tests 1.10. Post-Macron Consolidation Might Be On The Cards
EUR/USD tests 1.10. Post-Macron consolidation ahead?
On Friday, the dollar was in the defensive in Asia, but found a bottom later on as European markets were only modestly affected by the decline of commodities and Asian equities. The US payrolls were solid, but not strong enough to inspire a genuine USD rebound. USD/JPY and EUR/USD remained well bid going into the second round of the French election. USD/JPY finished the session at 112.71. EUR/USD closed at 1.0998.
In Asia, risk sentiment is constructive after the victory of Emmanuel Macron in the French Presidential election. Japanese equities show solid gains (2% +) as investors return from the Golden holiday week. The gains elsewhere in the region are more modest. Chinese equities underperform again. Chinese foreign trade data trailed census expectations, but the trade surplus was solid. USD/JPY opened north of 113 on the Macron victory but trades currently again in the 112.75 area. EUR/USD developed a similar pattern. The pair opened north of 1.10, but returned to the 1.0975 area. A Macron victory was largely discounted. The Aussie dollar stabilizes in the 0.74 area, close to recent lows, as industrial commodities including iron ore and copper, struggle to prevent further losses.
Today, there are only second tier data in Europe and the US. EMU Sentix investor confidence may rise further as European bourses have done well recently, but the report will have limited impact on trading. Markets already prepositioned for a Macron victory last week with European (French) equities outperforming. On the FX market this translated in a combined rise of EUR/USD, USD/JPY and EUR/JPY. Sentiment on risk will probably remain constructive at the start of trading in Europe. Even so, the risk-rally of EUR/USD and USD/JPY might run into resistance as investors will gradually turn their focus to the French Parliamentary election and how that will shape the outlook for France.
In a day-to-day perspective, USD/JPY and EUR/USD might probably hold near the recent highs. However, the upside momentum might slow. For EUR/USD, some (cautious) profit take on the recent euro rally might be on the cards. For USD/JPY, we keep an eye at global risk sentiment. US equities/equity futures will probably profit only slightly from the French election result. Commodities and China might are a wildcard, but might be a source of uncertainty. On the interest rate markets, a June rate hike is almost completely discounted. So, probably USD/JPY won’t get additional interest rate support. So, Last week’s combined rebound of USD/JPY and EUR/USD might see some modest profit taking. LT the ECB strategy/communication will be important for the fate of the euro. However, as we don’t expect a clear message before the June meeting, further euro gains might be less evident ST.
From a technical point of view, USD/JPY bottomed out in April and regained the 112.20 resistance last week. This improved the technical picture. However, followthrough gains were modest. Next intermediate resistance comes in at 115.51, but it might be too early for a retest of this level. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March. The pair returned to the range top after the first round of the French election and broke above the 1.09/1.0950 resistance at the end of last week. If confirmed, this break would improve the ST picture. Next resistance stands at 1.1129 (62% retracement) and at 1.1366 (correction top). A decline below 1.0821 would suggest that the dollar is regaining traction against the euro. A ST EUR/USD correction might occur as the pair is moving into overbought territory.
EUR/USD breaks above the recent highs in the 1.0950 area. However, some post-Macro consolidation might be on the cards
EUR/GBP
EUR/GBP fails to regain the 0.85 barrier for now
On Friday, there was no important UK news to guide sterling. The conservative party made good progress in local elections, indicating that PM May might secure a comfortable majority at next month’s Parliamentary. Cable held strong and drifted to the high 1.29 area. This suggests a slightly positive impact on sterling. The soft reaction of the dollar after the payrolls also supported cable. EUR/GBP traded with a slightly negative intraday bias. The pair closed the session at 0.8473.
Today; only the Halifax house prices are on the UK agenda. A rather soft report (0.1% M/M and 36% Y/Y) is expected. So, sterling trading will probably again be driven by the global trends in the euro and the dollar after the French election. Cable has been very strong of late, so there might be room for some consolidation to digest recent gains.
Two weeks ago, EUR/GBP dropped below EUR/GBP 0.84 support, (temporary) improving the sterling picture. The pair came within reach of the key 0.8305 support (Dec low), but no real test occurred. After a late April EUR/GBP rebound, the range bottom is better protected. Longer term, Brexit-complications remain potentially negative for sterling. On technical considerations we slightly prefer a EUR/GBP buy-on-dips approach.
EUR/GBP: downside better protected after recent rebound
