Sunrise Market Commentary
- Rates: Higher dots, higher US yields?
The US 5-yr, 10-yr and 30-yr yield arrived at key technical resistance levels ahead of the FOMC meeting. A rate hike is discounted and markets will be sensitive to the Fed’s intentions in the remainder of the year. Higher dots in 2018 & 2019 are likely, but will the central bank surprise by indicating to step up its tightening pace already this year? - Currencies: Will Fed give a strong enough message to kick-start new USD rally?
Yesterday, the dollar showed a mixed picture. EUR/USD reversed the post-payrolls rebound going into today’s Fed meeting. The Fed dots indicating four rate hikes this year would be USD supportive, but this scenario is not that evident. So, the bar for the dollar to already start a new sustained up-leg might be rather high
The Sunrise Headlines
- US equities corrected around 0.33% lower yesterday as the countdown to tonight’s FOMC meeting continues. Overnight, Asian stock markets trade near opening levels.
- The French prosecutor starts an inquiry which focuses on whether Business France, a government agency, was guilty of favouritism in organizing a Las Vegas trip for Emmanuel Macron, who was then economy minister.
- Most major Japanese companies offered the lowest hike in base pay in four years. Japan’s annual "shunto" spring wage increases are a barometer of corporate confidence and of whether consumer spending can get a boost.
- Today’s Dutch election should serve as a bellwether for upcoming votes in France and Germany. Wilders’ Freedom Party trails PM Rutte’s Liberals in surveys. The exit polls are expected after voting closes at 9 pm local time.
- China’s Premier Li Keqiang said that Beijing does not want to see a trade war with the US and urged talks between both sides to achieve common ground.
- Saudi Arabia, the world’s biggest oil exporter, moved to allay fears that the kingdom was backing away from its pledge to curb production, underlining its concern about a 10% plunge in the crude price over the past week.
- Today’s eco calendar contains UK labour market data, US Empire Manufacturing, CPI and retail sales. However, focus turns to the FOMC meeting. The German Finanzagentur holds a 30-yr Bund auction.
Currencies: Will Fed Give A Strong Enough Message To Kick-Start New USD Rally?
FOMC to decide on next directional USD move?
There was no clear driver for USD trading yesterday, as investors counted down to today’s FOMC decision. EUR/USD drifted south in the 1.06 big figure. Brexit and EMU political uncertainty probably weighed on the euro. USD/JPY was well bid early in the session, but failed to sustain north of 115 as risk sentiment eased. EUR/USD finished the session at 1.0604 (from 1.0653). USD/JPY closed at 114.75 (from 114.88).
Overnight, Asian equities show minimal losses, in line with the US yesterday. Chinese officials stressed that the are trying hard to avoid a trade war and repeated they intend to keep the yuan stable. EUR/USD stabilizes in the 1.0615/20 area. The rise in the oil price yesterday eve and minimal Asian equity losses help USD/JPY to stay off yesterday’s intraday low. The pair is trading the 114.80 area.
Today, there are plenty of US eco data. Fed will announce its policy decision and markets will keep an eye at the Dutch election . The outcome of the latter will only be available early tomorrow. So, no impact on FX trading today. Regarding the FOMC, a rate hike is fully discounted. Markets’ attention will go to the press conference and the economic and rate projections. We raised our rate expectations to four rate hikes this year, but we doubt this will already be seen in the median 2017 rate projection . It is more likely that the 2018/2019 median rate projection will be raised. Regarding the US data, headline CPI might hit a new high at 2.7% Y/Y, mostly due to base effects. Core CPI is expected to be up 0.2% M/M, but this might result in a 0.1%-point decline to 2.2% Y/Y. Risks might be on the upside. February retail sales are expected to have increased only 0.1% M/M and 0.2% M/M respectively for headline and core measures following strength in January. Gasoline sales (price effect) was a negative factor. Also here small upside risks. Yesterday, the dollar found a better bid after a disappointing post-Payrolls performance. The data are interesting, but big deviations from consensus are needed to trigger a directional move in the dollar ahead of the Fed. The dollar might be most sensitive for an unexpected rise of inflation. A rise in core yields due to higher oil prices might also be slightly USD supportive. The Dots raising the expected 2017 rate median rate hike expectation from 3 to 4 would support further USD gains. However, this scenario is not that evident. In case of higher rate expectations only for 2018/2019, the reaction of the dollar might be modest. We maintain a cautiously USD positive view going into the Fed policy decision. Even so, it won’t be easy for the dollar to break the next key resistance levels
(EUR/USD 1.0494; USD/JPY 115.62) without additional positive fiscal or economic news (especially higher price data). 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: Post-Payrolls USD setback reversed ahead of the FOMC decision
EUR/GBP
Sterling hovering up and down as Brexit start looms
On Tuesday, sterling was quite aggressively sold early in the session. Asian investors reacted to the Scottish PM Sturgeon initiative to start the procedure for a new ‘indiref’ and to the parliamentary final go to trigger the ‘real’ start of the Brexit procedure. Sterling set intraday lows against the dollar (1.2110 area) and the euro (0.8787 area) very early in European trading. Some consolidation and even a gradual intraday rebound kicked in. At the end of the day, sterling was little changed. EUR/GBP finished at 0.8726 (from 0.8719). Cable closed at 1.2153 from 1.2219, but this move largely mirrored the intraday rebound of the dollar.
This morning, sterling shows again some wild swings going in the close of the Asian markets. This time, sterling is captured by some short-squeeze in thin trading conditions, pushing the UK currency higher. We see no hard news to explain the move. There are headlines that the EU might delay the real start of the Brexit negotiations till June. Such a scenario is UK/sterling negative. Later today, the UK labour data will be published. Of late, momentum in the labour market eased a bit, but the overall picture remained constructive. We don’t have strong reasons to distance ourselves from the consensus, but softer data might reinforce the BOE wait-and-see approach: a mildly negative for sterling. However, the focus will be on the Brexit debate and on any fall-out from the FOMC decision. Sterling sentiment softened of late. EUR/GBP cleared 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 0.8854 correction top is the next key resistance. The nervous swings over the previous days suggest that a clear break beyond 0.8854 will be difficult without important news.
EUR/GBP; sterling shows some nervous swings as formal start of Brexit procedure is nearing
