Sunrise Market Commentary
- Rates: Yellen puts solid floor below US yield markets
Fed Yellen confirmed the recent hawkish shift and puts a bottom under US yield markets. It should strengthen markets’ sensitivity to US eco data, starting today with especially US CPI (expected to rise further above the 2%-target. With Yellen’s testimony out of the way, focus will start shifting to Trump’s ‘phenomenal’ tax plan, suggesting more upside for yields. - Currencies: Dollar extends gains as a next Fed rate hike is coming closer
Yesterday, the dollar was supported by comments from Fed’s Yellen as she acknowledged the risks of waiting too long to raise rates. Today, the focus is on the US data. The US CPI trending further north of 2.0% should protect the USD downside. Sterling traders will keep an eye at the UK labour data .
The Sunrise Headlines
- US stock markets ended around 0.4% higher following Fed Yellen’s bullish assessment on the economy with all main indices hitting new highs. Overnight, most Asian equity markets eke out even bigger gains.
- Janet Yellen’s first day testifying before Congress solidified investor views that the Fed chair is more hawkish, building on sentiment from the most recent Federal Reserve meeting and pushing Treasury yields higher.
- Campaigning for the Dutch election kicks off today with anti-Islam leader Wilders frontrunner in a vote that will test the anti-establishment sentiment that swept Britain out of the EU and Donald Trump into the US presidency.
- French presidential contender Fillon is grappling with resistance to his candidacy within his own Republican party even as polls show a tight race with Macron to reach the second round of voting with National Front leader Le Pen
- Eurogroup Dijsselbloem said on the Greek bailout: "People think that because there’s a Eurogroup next week we have to have it worked out. But that’s never been my timeframe. It’s unthinkable. The IMF must also be on board".
- Japanese PM Abe said US President Trump shared his view at last week’s summit that Japan’s monetary policy was not currency manipulation but to end deflation. Abe’s comments suggest Trump may be softening his criticism.
- US President Trump knew for weeks that national security adviser Michael Flynn had misled the White House about his contacts with Russia but did not immediately force him out, an administration spokesman said.
- Today’s eco calendar heats up with the UK labour market report and several US data (empire manufacturing, CPI, retail sales, industrial production). Yellen testifies to the House. Fed Rosengren and Lacker speak and the Riksbank meets
Currencies: Dollar Rally Slows Ahead Of Yellen Testimony
USD gains as Yellen won’t wait too long to hike rates
On Tuesday, EUR/USD and USD/JPY held tight ranges ahead of the semi-annual testimony of Fed chair Yellen before the Senate. Yellen reaffirmed that the Fed is coming closer to meeting its targets on employment and inflation. The Fed currently doesn’t include a big fiscal easing in its forecasts as there is still a lack of visibility on the any concrete measures. At the same time, the Fed is aware of the risks of waiting too long to rise rates. So, the Yellen comments could be considered as slightly hawkish. The dollar rallied. EUR/USD closed the session at 1.0578 (1.0598 on Monday). USD/JPY finished the session at 114.26 (from 113.74).
Overnight, Asian equity markets join yesterday’s post-Yellen rally. Japan profits most from the yen decline. USD/JPY is trading in the 114.35 area. In Parliament, PM Abe said that president Trump acknowledged that monetary policy tries to end deflation and is not FX manipulation. The PBOC strengthened the fixing of the yuan to USD/CNY 6.8632, despite overall USD strength, indicating that the PBOC aims tightening monetary policy. EUR/USD hovers in the 1.0580 area, near yesterday’s closing levels.
Today, the US economic calendar is well filled. January inflation is expected to have risen to 2.4% Y/Y from 2.1% Y/Y previously, but the core inflation is expected to have slid slightly to 2.1% Y/Y. We have no reasons to distance us from consensus. US Retail sales growth weakened in recent months. Also in January, sales might been weak. Unit car sales have eased, but higher gasoline prices will support the gasoline sales. January industrial production will have been held back by unseasonably warm weather affecting utility output. Manufacturing output is expected to rise modestly. Price data might be slightly more important for the (FX) market than the activity data. Inflation drifting further north of 2.0% might fuel market expectation on a near term Fed rate hike and support the dollar. Markets will also keep an eye at the Q&A of Yellen’s testimony before the House. Political tensions in France (Fillon) and uncertainty on a solution for the Greek debt crisis are still potential euro negatives. Yesterday, the dollar profited from Yellen’s comments. If the US data do not surprise on the downside, the dollar might remain well supported.
Global context: The dollar was in a corrective downtrend since the start of January as the Trump reflation trade petered out. Interest rate differentials in favour of the dollar narrowed. Trump’s communication became a source of uncertainty, also for the dollar. At some point, absolute interest rate support should provide a USD floor, especially as the Fed is expected to continue its policy normalisation. Last week, the dollar showed tentative signs of a bottoming out process, supported by the ‘Trump tax promise’. Euro weakness is a factor too. As we see the 1.0874 as solid resistance, a sell EUR/USD on upticks approach is favoured. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains key support. Post- Yellen, the downside of the dollar is better protected. Even so, we are still more cautious on the upside potential of USD/JPY compared to USD/EUR.
EUR/USD: dollar extends gradual rebound post-Yellen
EUR/GBP
EUR/GBP rebound blocked on euro softness
On Tuesday, UK pipeline inflation as indicated by the input PPI rose to a higher than expected 20.5% Y/Y. However, this cost is only filtering into the final consumer prices in a very gradual way. Headline CPI printed at a lower than expected 1.8% Y/Y. Core CPI stabilised at a soft 1.6% Y/Y. Yesterday’s CPI data gave the BoE the room to prologue their wait-and-see tactics. Sterling probably won’t receive additional interest rate support any time soon. EUR/GBP regained the 0.85 big figure after the CPI data, but returned below the 0.85 level as Yellen’s headlines weighed on EUR/USD and on EUR/GBP. EUR/GBP closed the session at 0.8482 (from 0.8460). Cable finished the day at 1.2468.
Today, the UK labour market data will be published. The UK labour market remains solid, but job growth eased of late. This picture will probably be confirmed by today’s data. The wage data have most market moving potential in case of a deviation from consensus. Weekly earnings growth is expected stable at 2.8% Y/Y. Apart from a big positive surprise, there is no reason to question the BoE’s wait-and-see stance. In this context, we don’t expect today’s data to be sterling supportive. Of course, overall euro softness is an issue for EUR/GBP. Context. Yesterday, EUR/GBP came within striking distance of the 0.8450 support, but a new test was avoided after the CPI data. The picture of EUR/GBP remains indecisive/fragile, but this is partially due to euro weakness, rather than outright sterling strength. We continue to look how the test of the key 0.8540 support turns out. In case of a break, the 0.8304 area is the next MT support. At least partially stop-loss protection on EUR/GBP longs may be considered
EUR/GBP: new test of the 0.8450 support is avoided, but picture remains fragile on euro softness
