Sunrise Market Commentary
- Rates: June rate hike discounted after FOMC meeting
The FOMC kept policy unchanged but labelled the Q1 growth slowdown as ‘transitory’, suggesting they remain on track to hike rates in June. The market implied probability of a June rate hike increased from 66% to 97.5%, triggering a modest repositioning in US yields (higher, front end underperforming). Today’s focus turns to US Congress. - Currencies: Dollar modestly higher on FOMC statement
The dollar gained modest ground as the Fed didn’t change rate hike expectations. The technical picture of USD/JPY improved as the pair regained the 112.20 level. Today, FX traders will keep an eye at the Healthcare vote in the US Congress and look forward to the payrolls. The dollar probably needs high profile good news to regain sustained ground against the euro.
The Sunrise Headlines
- US stock markets ended marginally lower with Nasdaq underperforming, dragged down by mediocre Apple earnings. Overnight, Asian stocks trade mixed with China underperforming following a weaker Caixin services PMI.
- The Fed kept policy unchanged and said it expected economic growth to rebound after a soft first quarter, signaling the central bank is likely to continue gradually raising short-term interest rates this year if it is right.
- France’s two presidential candidates clashed on primetime over the economy, home-grown jihadism and the EU, in a fierce showdown. An Elabe poll suggested that centrist Macron had appeared more convincing for 63% of the viewers.
- Theresa May has accused ‘European politicians and officials’ of threatening Britain and trying to sabotage her attempt to win the general election in an apparently deliberate move to stoke Brexit tensions with Brussels.
- House Republican leaders said the chamber would vote today on their bill to replace most of Obamacare, in a show of confidence that they can lock down enough Republican support for a bill that sparked a nationwide debate.
- Belgium sold about a quarter of its stake in BNP Paribas to raise cash (€2.03B), taking advantage of a rally in the stock as it neared a post-crisis high. The government’s stake drops from 10.3% to 7.8%
- Today’s eco calendar contains services PMI’s in EMU (final) and the UK and US weekly jobless claims. ECB Lautenschlaeger, Praet and Draghi are scheduled to speak. Spain and France tap the market. Norges bank decides on policy
Currencies: Dollar Modestly Higher On FOMC Statement
Dollar gains modest ground after Fed decision
Trading in EUR/USD and USD/JPY was locked in tight ranges yesterday as investors awaited guidance from the Fed’s policy statement later in the evening. The Fed kept its policy unchanged and basically maintained its assessment from March. Q1 economic weakness is considered transitory. So, the expected path of (at least) two additional rate hikes this year remains valid. The dollar gained modest ground after the Fed’s policy statement. EUR/USD closed the session at 1.0886 (from 1.0930). USD/JPY finished the day at 112.75, from 111.99.
Overnight, Asian equities show a mixed picture. Japan is still closed for the golden week holidays. Chinese equities again underperform. After the Caixin manufacturing PMI, also the services PMI declined, from 52.1 to 51.2. Yesterday’s substantial decline of several industrial commodities might be a (slightly) negative for some Asian markets this morning. The dollar maintains most of its post-Fed gains. EUR/USD trades around 1.0895. USD/JPY is changing hands in the 112.80 area. The Aussie dollar is trading at the lowest level since mid-January (0.74 area). The stronger US dollar and lower commodities weighed on AUD. RBA’s Lowe warned that high household debt makes the economy less resilient to shocks.
EMU data (final April services PMI and EMU March retail sales) probably won’t move FX trading today. US eco data are plentiful (Challenger layoffs, initial claims, nonfarm productivity, factory orders and the March trade balance ) but the impact on the dollar, if any, should only be of intraday significance on the eve of the US payrolls report. Speeches of ECB president Draghi and Executive Board members Praet and Lautenschlaeger might be more important. Draghi last week held off the debate on policy normalization. Since, inflation came out much stronger than expected, but it is unlikely that he will already change his view. However, we are keen the hear the view of Praet and hawk Lautenschlaeger. Will she start the offensive of the hawks?
In a daily perspective, the dollar might be better supported after yesterday’s Fed statement. The market almost fully discounts a June rate hike (97.5%). This should be modestly USD supportive. ECB speakers are a wildcard for the euro. As we don’t expect Draghi or Praet to already signal a change in their assessment, the euro reaction should be limited. However, any small hint might be euro supportive. Of late, USD/JPY profited most from a rise in core yields. This trend might continue. For EUR/USD, we expect the pair to stay away from the 1.0950 resistance going into the payrolls. However, really strong US data/or other good news (Healthcare bill?) are probably needed to push the pair back south.
Last week, the European risk trade supported USD/JPY, but also EUR/USD and EUR/JPY. The market pondered whether declining political risk could bring forward the ECB’s normalisation process. This hope was moderated after the ECB press conference. The Fed confirming its intentions on policy normalisation is also slightly USD supportive. From a technical point of view, USD/JPY started a bottoming out process and yesterday’s re-break above 112.20 improved the technical picture. Next intermediate resistance comes in at 115.51. 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 French election and set minor new highs. Yesterday’s move slightly eased the upside momentum, but the technical picture hasn’t changed. A decline below 1.0821 would suggest that the dollar is regaining traction against the euro. For now, we maintain a neutral bias.
R/USD declines modestly after Fed policy statement, but technical picture is little changed
EUR/GBP
Brexit tensions slightly weigh on sterling
Sterling was under pressure at the start of European trading yesterday as an FT article indicated that the EU could demand the UK a ‘separation charge’ of up to €100B. The report followed other recent signals that the UK and the EMU might be heading for very tough Brexit-negotiations. EUR/GBP touched an intraday top of 0.8476. Cable spiked to the 1.2885 area. However there was no follow-through sterling selling. The UK April construction PMI rebounded to 53.1 from 52.2 (52.0 was expected). The release is not that important for markets, but it helped to put a floor for sterling even as the political bickering between the EU and the UK continued. EUR/GBP closed the session at 0.8460. Cable finished the day at 1.2867, but part of the intraday decline was due to the post-Fed USD rebound.
Today’s eco calendar contains the services PMI and the monetary data. The services PMI is expected to decline slightly from 55.00 to 54.5. However, the manufacturing measure and the construction PMI surprised on the upside. A really strong figure might be slightly supportive for sterling. Over the previous days, Brexit tensions between the UK and the EU came again more to the forefront as a driver for sterling trading. Overnight, UK PM May accused EU officials of interfering in the UK election process. If the bickering continues it might be a further negative for sterling. We have the impression that the downside in EUR/GBP has become better protected.
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 last week’s EUR/GBP rebound, the range bottom is better protected. Longer term, Brexit-complications remain potentially negative for sterling. On technical considerations we are inclined to reconsider a cautious EUR/GBP buy-on-dips approach.
EUR/GBP: downside better protected after last week’s rebound
