Sunrise Market Commentary
- Rates: Underperformance of Bunds vs US Treasuries today?
Today’s eco calendar remains second tier, but EC economic forecasts and a speech by ECB Praet are wildcards. Higher growth forecasts could be a harbinger for higher ECB staff projections at the June policy meeting and raise ECB exit speculation. Praet could hint in the same direction, potentially resulting in an underperformance of Bunds today. - Currencies: Dollar trending gradually higher with USD/JPY taking the lead
Yesterday, the dollar gained modest further ground on higher core yields and higher oil prices. Today, strong EC economic forecasts might slow the decline of EUR/USD. Sterling traders will closely watch the BoE’s inflation report even as the BoE will take a cautious stance going into the parliamentary elections
The Sunrise Headlines
- US stock markets managed to overcome initial weakness, but eventually ended flat. Overnight, most Asian equity markets are slightly in positive territory with China once more underperforming.
- New Zealand’s central bank kept interest rates at a record low 1.75% and forecast they will remain there for an extended period, saying inflation will slow. NZD/USD fell from 0.6940 to 0.6820, the lowest level since June 2016.
- The Federal Reserve should begin plotting the shrinking of its $4.5T balance sheet after its next rate increase, Boston Fed Rosengren said, as he warned again over the risks of the economy overheating.
- Kansas City Fed researchers say that reducing the US central bank’s $4.5T portfolio by $675B over two years is “about equivalent to a 25 bps hike in the funds rate.”
- Oil prices rose more than 3% with Brent crude back above $50/barrel, bolstered by the biggest one-week drop in US inventories so far this year, and after Iraq and Algeria joined Saudi Arabia in supporting an extension to OPEC supply cuts.
- Labour is planning to partly nationalise Britain’s energy industry and fully renationalise the railways and Royal Mail, as Jeremy Corbyn prepares to launch his party’s most left-wing manifesto since 1983.
- Today’s eco calendar contains UK industrial production data, the BoE’s policy meeting and weekly US jobless claims. ECB Praet and Fed Dudley speak. Italy and the US tap the market. The ECB publishes its monthly bulletin and the EC releases its April forecasts.
Currencies: Dollar Trending Gradually Higher With USD/JPY Taking The Lead
Dollar extends gradual rebound, in particular USD/JPY
The dollar traded uneventful on Wednesday. US and European equities didn’t go anywhere and eco data were uneventful. A late session rally of oil and hawkish comments from Fed’s Rosengren were moderately supportive for the dollar. USD/JPY profited most to close the session at 114.28, near the correction top. The gain of the dollar against the euro was much more limited. The pair closed at 1.0866, only marginally lower than on Tuesday (1.0874).
Overnight, most Asian equity indices gained ground with the Nikkei and the Korean indices at multi-month highs. The mainland China indices are captured in a protracted downtrend and are nearing first support levels. Until now the Chinese underperformance had little impact on other markets, but the issue deserves close monitory. USD/JPY (114.20) remains in risk-on modus, holding within reach of the recent highs. EUR/USD is going nowhere in the 1.0865 area. The Reserve Bank of New Zealand left its policy rate unchanged at 1.75%. The statement remained more neutral than markets had expected (see headlines). The RBZN welcomed the recent deprecation of the New Zealand dollar. NZD/USD dropped almost one big figure and trades in the 0.6835 area.
Today, US initial claims and the PPI will be published. Producer prices are expected to have risen modestly, both for the headline and the core reading to respectively 2.2% Y/Y and 2.3% Y/Y. Such an outcome would be quite neutral for (FX) markets. Initial claims are also expected little changed. The EU economic forecasts are interesting as they may give an idea on the important ECB staff estimate at the June ECB meeting. A positive assessment might be slightly supportive for the euro. ECB’s Praet will speak again today. Will he give more weight to recent positive developments?
Earlier this week, fortunes changed (temporarily?) in favour of the dollar. Today, we expect the cautious uptrend in core yields to continue (see above EC Forecasts/eventually Praet). This remains positive for EUR/JPY, while the decline of EUR/USD might slow or even halt. The next more important dollar move might be driven by tomorrows US data (retail sales and CPI).
From a technical point of view, USD/JPY broke the 112.20 resistance improving the technical picture. The rebound continues in a gradual way, but looks quite robust. 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 that range top and broke above the 1.09/1.0950 resistance last week, but the break wasn’t confirmed and a correction kicked in. A sustained break higher would improve the ST picture. Next resistance stands at 1.1129 (62% retracement) and at 1.1366 (correction top). A decline below 1.0821 would suggest that the dollar is regaining traction against the euro. Will tomorrow’s US data be strong enough to do this Job?
EUR/USD correction to slow?
EUR/GBP
EUR/GBP drifting back to 0.84 area.
Yesterday, sterling showed no clear trading pattern. The modest EUR/USD decline initially weighed slightly on EUR/GBP. The pair dropped temporary below 0.84 but returned to the big figure later. Cable was better bid early the session. However, the 1.30 level was a tough resistance and the pair drifted back south. Some squaring of positions ahead of today’s BoE decision was maybe also in play. EUR/GBP closed the session exactly at 0.84. Cable finished the day at 1.2938.
Today, the BoE policy decision and even more on the new BoE inflation report will dominate trading and trump the data releases. The policy rate is expected unchanged (0.25%). Last month, the tone of the BoE communication (inflation report) was rather hawkish. One member even voted for a rate hike. The eco assessment might now be a bit softer after the poor Q1 growth and slowdown in consumer spending. The BoE will probably continue to warn about an inflation overshoot, but the recent sterling strength and upcoming elections should result in more balanced to soft BoE comments. The timing of a potential first rate hike is still far away. This scenario is slightly sterling negative short-term.
EUR/GBP is locked in a ST sideways 0.83/0.85 range after a substantial decline in March/April. The pair came within reach of key 0.8305 support (Dec low), but no real test occurred. After a late April EUR/GBP rebound, the range bottom looks better protected. Longer term, Brexit-complications remain potentially negative for sterling. On technical considerations, we slightly prefer a EUR/GBP buy-ondips approach. A modest softening in the BoE tone might help solidify the Cable 1.30 cap and support a bottoming out process in EUR/GBP
EUR/GBP: will BoE slow the recent strong performance of sterling?
