Sunrise Market Commentary
- Rates: Waiting game continues
Today’s eco calendar contains several eco data, but we don’t think they will impact trading. We expect sideways action and don’t think that Trump’s latest scandal will have a lasting impact on risk sentiment. If oil prices extend their rally, they could inflict some losses on core bonds. Speeches by ECB governors are wildcards in the run-up to the June policy meeting. - Currencies: EUR/USD again nearing the 1.10 barrier
The euro profited most yesterday from recent disappointing US data. EUR/USD is again nearing the recent highs. Today’s US eco data might be constructive, but it’s not sure they will be strong enough to change fortunes in favour of the dollar. EUR/GBP is also near a first technical resistance at 0.8509/31. Today’s UK CPI data might decide on a break.
The Sunrise Headlines
- Wall Street began the week on the front foot as a rally in oil prices propelled energy stocks higher. Both the S&P 500 and Nasdaq set new intraday and closing highs after gaining 0.5%. Overnight, Asian stock markets trade mixed.
- US President Trump shared sensitive intelligence obtained from a close US ally with Russia’s foreign minister and ambassador, according to US officials, jeopardizing critical intelligence-sharing agreements in the fight against IS.
- Angela Merkel and Emmanuel Macron promised to work together to deepen EU integration and reinforce the eurozone as the new French president visited the German chancellor in Berlin the day after his inauguration.
- Australia’s central bank was confident core inflation would pick up by early 2018, but worries about a subdued labour market amid soaring household debt forced it to stand pat on rates, Minutes of the May meeting showed.
- Dutch coalition talks between Liberals, Christian Democrats, D66 and the Greens to form a new government collapsed over disagreements on how to tackle immigration, Edith Schippers, who led the negotiations, said.
- The Czech crown firmed to its strongest level against the euro, below EUR/CZK 26.50, since the central bank scrapped an intervention regime keeping it weak EUR/CZK > 27.00) on April 6.
- Today’s eco calendar is busy with UK CPI, German ZEW, the second reading of EMU Q1 GDP, US housing starts, building permits and industrial production. ECB Nowotny and Coeuré are scheduled to speak.
Currencies: EUR/USD Again Nearing The 1.10 Barrier
EUR/USD returns to 1.10 area
On Monday, the euro remained well bid in a technically driven session. The dollar suffered further follow-through selling after Friday’s weak US data. A weak US manufacturing index gave EUR/USD some additional fuel. Ongoing speculation on ECB QE tapering was also mention as supporting the euro. EUR/USD traded with a positive intraday bias and settled in the high 1.09 area later in the US. The pair closed the session at 1.0975. The dollar performed better against the yen as US equity sentiment remained constructive, with both the Nasdaq and the S&P touching all time record highs. USD/JPY finished the session at 113.79 (from 113.38).
Overnight, Asian equities took a strong start after the WS record race, but the momentum dwindled as trading preceded. The Press headlines of US President Trump revealing classified information may have caused some investors caution. USD/JPY retreated off this morning’s highs in the 113.80 area and trades currently in the 113.50 area. By default EUR/USD buying persists the pair is changing hands with reach of the 1.10 barrier.
Today, the German ZEW economic sentiment is expected to improve (expectations). As both equities and the economy continue to do well, a rise is likely. EMU Q1 GDP is expected to stay unrevised. US housing starts are expected to have rebounded in April keeping them near cycle highs. Permits did better in March and are expected to have stabilized in April (also near highs). Industrial production did fine in March (+0.5% M/M) but mainly due to utility output. For April, we expect production data to be strong. So, we expect good US eco data, but they are probably no (positive) game-changer for the dollar. Negative surprises may get more attention. ECB Coeuré is a key member of the ECB executive board. He recently said as first ECB member that risks were balanced and suggested that the forward guidance might need to be changed some time in the future. While he speaks after European closures, markets will closely listen to him.
Short term trading assessment
The USD/JPY rebound ran into resistance last Thursday when equities stabilized and on Friday after soft US inflation and retail sales. A correction was upcoming after a 6 big figure gain from mid-April to mid-May. Some more corrective losses shouldn’t surprise, but as long as USD/JPY 112.20 holds, the outlook for the dollar versus yen remains positive. A buy on dips of USD/JPY near these levels looks appropriate. The Fed will continue to tighten policy and the stronger labour market should ultimately lead to higher wages and inflation. Last week, it looked that EUR/USD could revisit the 1.0821/1.0778 support (gap). However, Friday’s data poured some cold water on the dollar’s short term comeback. The US and EMU eco calendars are thin this week, but the euro clearly gets the advantage of the doubt. EUR/USD is nearing the top of the 1.0821/1.0778 to 1.1023 range. For now, we don’t preposition for a sustained break higher, but the dollar remains most vulnerable to negative surprises, from whatever source.
From a technical point of view, 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, but the break wasn’t confirmed. 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.
EUR/USD again nearing the recent highs as euro remains on poleposition
EUR/GBP
EUR/GBP resistance at 0.8509/31 under test
EUR/GBP trading was sentiment-driven on Monday .Sterling tried to regain part of Friday’s losses in Asian and early European trading, but the EUR/GBP decline stalled at 0.8458. Later, the pair followed EUR/USD higher and regained the 0.85 handle, testing first resistance (0.8509/31). Cable initially rebounded to the 1.2940 area, probably on USD softness, but couldn’t maintain the intraday gains. EUR/GBP closed the session at 0.8510 (from 0.8476). Cable finished the day 1.2896, little changed from Friday.
Today, the UK April Price data, including the CPI will be published. Headline CPI is expected to rise 0.4% M/M and 2.6% Y/Y (from 2.3%). The core CPI is also expected substantially higher at 1.8% Y/Y to 2.3% Y/Y. The rise in UK inflation took a breather in March but this might have been due to technical factors. PPI inflation is expected to slow after a strong run over the previous months. A further rise in April is likely. However, after last week’s moderate/balanced BoE approach, we think that a substantial overshoot is needed for the inflation data to support sterling. Softer data might reinforce the market feeling that a BoE interest rate is still very far away. In a day-to-day, perspective, we doubt that sterling will get big support from today’s data. At the same time, the euro remains in good shape. So a further test of the 0.8509/31 resistance neckline is likely.
Recently, EUR/GBP was locked in a ST sideways range (0.83/0.85) after a substantial decline in March/April. The pair developed a bottoming out pattern with 0.84/0.8330 as a solid bottom. A breach of 0.8509/31 (previous ST tops) would improve the technical picture. We slightly prefer a EUR/GBP buy-on-dips approach. Longer term, Brexit-complications remain potentially negative for Stering
EUR/GBP: first resistance at 0.8509/31 is under test as euro is better bid across the board
