Sunrise Market Commentary
- Rates: More consolidation on bond markets?
Today’s eco calendar won’t inspire trading ahead of Dutch elections and key central bank meetings (Fed, BoE, BoJ). We expect more consolidation on bond markets. US dealing desks will probably be thinly staffed because of the blizzard. Traded volumes could be lower than usual. - Currencies: Post-payrolls USD softness short-lived. Sterling feels Brexit-headwinds
Yesterday, the dollar gradually found its composure after a disappointing reaction to the payrolls on Friday. The dollar is again better bid going into the FOMC policy decision. Yesterday, sterling showed remarkable strength, but this morning the UK currency is sold as PM May received the green light to start the formal Brexit negotiations.
The Sunrise Headlines
- US equities stock markets ended an uneventful session mixed. Overnight, Asian markets tread water as well with investors side-lined ahead of key policy meetings later this week (Fed, BoJ, BoE,…)
- British lawmakers removed the final hurdle to PM May’s plan to start talks on the UK leaving the EU, a milestone moment that sets the stage for unwinding 40 years of close and complex cross-Channel ties.
- China’s factory output (6.3%) and fixed-asset investment (8.9%) grew more strongly than expected in the first two months of the year, but retail sales (9.5%) disappointed after the government reduced a tax break on small cars.
- German FM Schaeuble sees a threat to Germany’s ability to maintain a balanced budget given mounting pressures to increase government spending, the Passauer Neue Presse newspaper reported.
- US Treasury Secretary Mnuchin will push the world’s top economies to abide by existing exchange-rate agreements and promote open and fair trade at a meeting of finance chiefs this week, a senior Trump administration official said.
- A classic ‘nor’easter’ is expected to lash the US East Coast with snow and blizzard conditions today, bringing a late blast of winter to a region where residents only recently thought spring was in the air.
- Today’s calendar contains German ZEW-indicator, US small business optimism and US PPI inflation. The Netherlands taps the bond market.
Currencies: Post-Payrolls USD Softness Short-Lived. Sterling Feels Brexit-Headwinds
Post-Payrolls USD correction didn’t go very far
On Monday, the euro reversed part of Friday’s gain as speculation on an ECB rate hike eased. There was little news from the dollar side of the story. Even so, global bond yields moved higher during the US session, but it had only limited impact on the major USD cross rates. EUR/USD closed the session at 1.0653 (from 1.0673 on Friday). USD/JPY held in the upper half of the 114 big figure and closed near the intraday highs (114.88 from 114.79 on Friday). USD traders waited for the Fed.
Overnight, Asian equities show a mixed picture. Regional markets basically remain in a wait-and-see modus ahead of the policy decisions from the Fed (Wednesday) and the Bank of Japan (Thursday). USD/JPY hovers in t tight range slightly below 115. EUR/USD trades around 1.0655.
Today, eco calendar is only modest interesting. German ZEW investors sentiment (expectations) is expected to rebound from 10.4 to 13. Any euro impact should be very limited. In the US, the NIFB small business confidences is expected to stabilize at a historically very high level (105.6 from 105.9). US PPI data probably have most market moving potential. For the headline figure, a modest rise from 1.6 Y/Y to 1.9% Y/Y is expected. An upward surprise might cause some nervousness on the bond markets and be slightly supportive for the dollar as markets are more sensitive for price data (compared to activity data). However, we don’t expect USD investors to adapt positions in a profound way one day before the FOMC policy decision. That said, the disappointing USD price action of the USD after the payrolls is apparently more or less digested. So, the dollar might regain slightly ground in case of a further rise in core bond yields or in case of USD supportive eco data. For now, the Dutch elections are no big issue for FX markets. Uncertainty might be slightly negative for the euro.
Of late, USD/JPY profited most from higher core/US bond yields. The 115.62 range top came within reach on Friday, but a real test didn’t occur. Some shortterm consolidation might be on the cards ahead of the FOMC policy decision. The dollar apparently needs some additional positive news to start a new up-leg (e.g. a higher Fed rate hike path/dots). Recent gains of the dollar against the euro were less convincing. A first intermediate resistance at 1.0679 was (temporary?) broken as markets were haunted by rumours that the ECB was considering a rate hike before ending the APP. We still assume EUR/USD 1.0829/74 will be difficult to regain. A sell EUR/USD on upticks remains favoured, even as we have to admit that the USD/EUR momentum isn’t convincing. At the same time, the dollar still enjoys the supported of a massive interest rate differential, discouraging USD short positions.
EUR/USD: no follow-through gains after (temporary) break of 1.0679 resistance
EUR/GBP
Sterling to feel more Brexit headwinds?
On Monday, sterling sentiment improved even as the news flow was obviously UK/sterling negative. EUR/GBP traded in the 0.8785/75 area before the start of European trading, but soon dropped back to the mid 0.87 area. The global EUR/USD decline played a role, but sterling was strong across the board. We consider it a short squeeze in a market that had become a bit too much sterling short. During the day, Scottish PM Sturgeon announced she will take steps next week for a second independence referendum which might take place between autumn 2018 and spring 2019. Later in the session, the House of Comments voted the Brexit bill that allows PM May to trigger Article 50 of the Lisbon Treaty. The reaction of sterling was remarkably mild. EUR/GBP finished the session at 0.8725 near the intraday low.
This morning, there is not much left of yesterday’s constructive sterling sentiment. The UK currency is facing heavy headwinds both against the euro and the dollar. We don’t see specific headlines, but markets apparently adapt positions for tough Brexit negotiations. The rift between London and Scotland on the Second independence referendum might be a negative, too. There are no important UK eco data, suggesting trading will be dominated by the Brexit headlines. Sterling sentiment softened of late. The euro was in better shape helping EUR/GBP to break the 0.8592 resistance, which improved the technical short-term EUR/GBP picture. We don’t expect a sustained EUR/USD rebound , but a combination of temporary euro consolidation and ongoing sterling softness as the Brexit negotiations are nearing, might trigger some more ST EUR/GBP gains. The break north of 0.8645 reinforces the ST positive momentum. The 0.8854 correction top is the next key resistance.
EUR/GBP uptrend continues despite yesterday’s pause. 0.8854 remains next key reference
