Sunrise Market Commentary
- Rates: Litmus test for US Treasuries
Bonds will especially be sensible to downside US eco surprises today even if we side with consensus (CPI) or even see upside risks (retail sales). US stock markets yesterday also showed first cracks in the armour, suggesting a more profound correction could be coming up. Thus, the bond reaction could be asymmetric (limited room for losses, more potential for gains). - Currencies: US data to decide on the next directional USD move
Today’s US CPI and retail sales will be key for ST USD sentiment. We expect both the CPI and the retail sales to meet the consensus or even come out stronger. This should support a further USD rebound. However, a negative surprise might raise doubts on the Fed rate hike path and trigger a significant setback of the dollar. Especially USD/JPY is vulnerable.
The Sunrise Headlines
- US stock markets initially lost around 0.75%, dragged down by the retail sector as Nordstorm followed Macy’s and Kohl’s with weaker earnings, but eventually erased most of the losses. Most Asian bourses lose ground overnight.
- The Trump administration agreed with Beijing on a broad range of measures aimed at improving the access of American beef producers, electronic-payments providers and natural-gas exporters, among others, to China.
- En Marche! has picked political novices to run in parliamentary elections next month. Only 24 on the list of 428 candidates are sitting MPs, all Socialists, and 52% have never held elected office. Half are women and the average age is 46.
- The PBOC injected fresh funds through a MT lending facility while keeping a tight rein on ST funding in a further effort to dampen speculative investment while keeping the economy adequately funded.
- Austria’s political elite is steeling itself for possible early elections after a government crisis that could provide a boost to a far right party just months after it narrowly failed to secure the country’s presidency.
- Concern about Canada’s heavily indebted households and hot housing market ratcheted higher after Moody’s downgraded the ratings for Canada’s major banks.
- Today’s eco calendar heats up in the US with inflation data, retail sales and University of Michigan consumer confidence. Voting FOMC governors Evans and Harker are scheduled to speak. In EMU, only outdated production data will be released.
Currencies: US Data To Decide On The Next Directional USD Move
US CPI and retail sales to decide on ST USD trend
Yesterday, EUR/USD and USD/JPY initially drifted sideways. Both cross rates lost ground as equities fell prey to modest profit taking . The US eco data (PPI and claims) were better than expected. Core yields rose temporary, but were not able to trigger more USD gains. Technical trading ahead of today’s US CPI and retail sales prevailed. EUR/USD closed session at 1.0861, little changed from Tuesday (1.0868). USD/JPY finished the day at 113.86 (from 114.28) on equity softness.
Overnight, the picture on Asian equity markets has changed. Most indices are losing modest ground as investors take profit. Some caution ahead of the US retail sales may be in play. China is the positive exception to the rule as authorities provided additional liquidity to prevent further losses. EUR/USD is stabilizing in the 1.0875 area. USD/JPY trades at 113.65/70, off the recent highs, but above yesterday’s correction low. Commodity currencies like the AUD and the CAD show some tentative signs of bottoming after the recent setback.
Today, the US CPI and retail sales are key for global trading, including the dollar. Last month the core CPI unexpectedly declined, questioning whether underlying inflation would trend higher as the Fed assumes. Part of the decline was due to the timing of Easter. That should be reversed this month. However, other structural factors might also be at work. Yesterday’s producer prices surprised on the upside which caused some relieve. However, this relief will have to be confirmed in a CPI rebound today. April retail sales are expected to rebound (0.6% M/M) after two monthly declines. Consumption was tepid in Q1, but the Fed assumes it was temporary. We side with the Fed and even see room for an upward surprise. That said, a shortfall won’t pass unnoticed. Finally, the May Michigan consumer sentiment is expected to have stabilized at 97. Earlier this week, fortunes changed in favour of the dollar, but the USD/JPY rebound ran into resistance yesterday as equities stabilized. Today’s US retail sales and CPI might be a ST game changer for the dollar. We expect that the consensus will be reached, or even surpassed. Such a scenario could inspire further USD gains, as it would cement the expected Fed rate hike path. This is our preferred scenario. If so, EUR/USD might revisit the 1.0821/1.0778 support (gap). However, a negative surprise also won’t pass unnoticed. Especially USD/JPY might see further profit taking in case of disappointing US data
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 finally 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 today’s US data be strong enough to do this Job?
EUR/USD: Will USD data be strong enough to push the pair to/below the 1.0821 support
EUR/GBP
BoE: no game-changer for sterling trading
UK eco data (production and trade balance) disappointed again, but the focus was on the BoE’s policy assessment. The BoE kept a balanced approach. The BoE indicated that an earlier rate hike might be needed in case of a smooth Brexit. However, what are the chances for this scenario? The moves in sterling remained modest, but the market apparently concluded that the BoE will give slightly more weight to supporting growth rather than fighting inflation. The vote was again 7-1 for an unchanged decision. There was no additional support for a rate hike, what some apparently expected. Sterling lost moderate ground after the decision. EUR/USD closed the session at 0.8428 (from 0.8400). Cable drifted further away from 1.30 resistance and closed the session at 1.2886.
There are no eco data in the UK today. The focus will be on the global market reaction to the US data. A further technical correction/rejected test of the GBP/USD 1.30 area might be slightly negative for sterling overall. Yesterday’s BoE meeting was no game changer for sterling trading. The BoE remains in wait-andsee modus. For now, there is no trigger available to push EUR/GBP out of the established consolidation pattern.
EUR/GBP is locked in a ST sideways range (0.83/0.85) 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.
EUR/GBP: sterling declines slightly after BoE, but the policy statement was no game changer for sterling trading
