Sunrise Market Commentary
- Rates: Hawkish ECB Minutes are bearish for Bunds
Hawkish ECB Minutes surprised markets yesterday. They suggest changes to the ECB’s forward guidance early this year. The German 10-yr yield is heading for a test of the 2017 cycle top at 0.62%. Today’s eco calendar heats up in the US with CPI and retail sales. Especially higher CPI readings won’t go unnoticed in current volatile, negative, core bond sentiment. - Currencies: EUR/USD nears again 1.2092 range top
USD weakness was replaced by euro strength yesterday as the ECB Minutes signaled a potential change in the central bank’s policy assessment. US CPI and retail sales take center stage today. A miss might cause further USD softness short-term. The key EUR/USD 1.2092 resistance might again be challenged.
The Sunrise Headlines
- US stock markets overcame Wednesday’s off-day and closed around 0.7-0.8% higher, supported by a weaker dollar. Risk sentiment is positive overnight with China and mainly Japan underperforming.
- China’s exports rose more than expected in December (10.9% Y/Y), but import growth (4.5% Y/Y) slowed dramatically, helping to drive up the country’s trade surplus to $54 bn for the month, the highest since January 2016.
- NY Fed president Dudley said that US tax cuts pushed through last month added to the risk that the economy could overheat, hardening the case for higher short-term interest rates.
- The EU has begun debating the price for prolonging Britain’s Brexit transition beyond December 2020, with Brussels, Paris and Berlin attempting to maximise their bargaining power should trade talks drag on for several years.
- Bulgaria stepped up its campaign to adopt the euro, challenging member states to let it into the single currency’s "waiting room" in the coming months or spell out why it cannot join.
- Brazil paid the price for failing to approve President Temer’s flagship pension overhaul as S&P downgraded Latin America’s largest economy further into junk territory (BB-; outlook stable).
- Today’s eco calendar heats up with US retail sales and CPI data. ECB Weidmann and Boston Fed Rosengren are scheduled to speak. The Q4 earnings season kicks off with JP Morgan and Well Fargo
Currencies: EUR/USD Nears Again 1.2092 Range Top
EUR/USD 1.2092 resistance again on the radar
The dollar entered calmer waters yesterday as China indicated that news on the country reducing US Treasury holdings was false. However, calm was disturbed by the December ECB Minutes. The ECB discussed a change in communication. Forward guidance will focus more on interest rates rather than on the APP. The Minutes propelled EMU yields and the euro. EUR/USD jumped north of 1.20. The US PPI printed softer than expected and gave no reason for the dollar to counterbalance the rise of the euro. EUR/USD finished the day at 1.2032. USD/JPY lost modestly further ground and closed at 111.26, despite strong US equities.
Overnight, Asian equities mostly trade in positive territory. Japan underperforms as the strong yen weighs. EUR/USD holds in the mid 1.20 area. There are only second tier EMU data today, but markets will still contemplate the consequences from yesterday’s ECB Minutes. US data contain the December CPI and retails sales. Retail sales are expected solid (0.5% M/M headline; 0.4% control group). Headline CPI is expected subdued (0.1% M/M and 2.1% Y/Y, core 1.7% Y/Y).
The dollar was resilient yesterday as the Chinese news was dismissed. Euro strength finally prevailed after the ECB minutes. US price data were not really strong of late. Retail sales are expected solid. So, an outright beat for US data is not that evident. Another miss in the US data contains the risk for further USD losses short term. EUR/USD might revisit the 1.2092 top. This level proved solid off late. We don’t preposition for a break yet, but the pressure grows. Partial stop-loss protection against a break beyond 1.21 might be considered. We look out whether the USD/JPY decline might slow after this week’s setback. If so, it could be a first sign that pressure on the USD might ease.
There were no important UK data yesterday. Underlying sterling sentiment was sluggish as the bickering on Brexit, including on the role of the UK financial sector, continued. In the afternoon, EUR/GBP jump above 0.89 on the ECB minutes. The pair closed the day at 0.8888. There are again no UK data today. Political noise and the broader EUR & USD price moves will guide sterling trading. Euro strength and Brexit uncertainty will probably keep the downside in EUR/GBP well protected. We keep a EUR/GBP buy-on-dips in case of return action to 0.87 big figure. A break beyond 0.8925 would indicated a further improvement in the ST EUR/GBP momentum.
EUR/USD 1.2092 again within reach after ECB Minutes. US data to decide on a break?
