Sunrise Market Commentary
- Rates: Trump affaire deteriorates risk sentiment
Risk sentiment deteriorated overnight as the Russia-related Trump affaire took on bigger proportions. Safe havens like US Treasuries, gold and JPY gained ground. The absence of eco data suggests that risk sentiment will be today’s key driver for trading. A break from the US Note future above 125-26+ would suggest return action to the contract high short term. - Currencies: US political risk hammers US dollar
Yesterday, EUR/USD was propelled both by euro strength and USD softness on recent poor US eco data. A flaring up of political issues in the US is putting additional pressure on the dollar. Especially USD/JPY is vulnerable if risk sentiment deteriorates. The UK labour data are in focus for sterling trading. The UK currency recently lost its positive spin
The Sunrise Headlines
- Wall Street ended unchanged (Dow, S&P) with Nasdaq outperforming (+0.33%), marching to a new record high. Overnight, risk sentiment deteriorated as the latest Trump-scandal escalates.
- President Trump asked then-FBI Director Comey to back off the investigation of former National Security Adviser Flynn shortly after Mr. Flynn had resigned, according to two people close to Mr. Comey.
- Austrian centre-left Chancellor Kern said leaders of the parties in Parliament had agreed on snap elections Oct. 15, a year earlier than scheduled and giving the anti-immigrant Freedom Party a strong chance to enter the government.
- The ECB is not concerned by a recent rise in EMU bond yields as they reflect improved growth prospects, receding fears of deflation, improved inflation expectations and increased risks from outside the bloc, governor Coeure said.
- The US economy is forecast to expand at a 4.1% annualized pace in Q2 according to the latest update of the Atlanta Fed’s GDP Now forecast model. Our in-house model currently expects 3.1% Q/Qa growth.
- Australia had its AAA credit rating affirmed by S&P after the government’s latest budget projected a return to surplus by 2021.S&P kept a negative outlook, issued in the wake of a knife-edge federal election last July.
- Today’s eco calendar is thin with UK labour market data and final EMU CPI figures. Germany sells its 30-yr Bund and Greek parliament is expected to vote on additional reform measures.
Currencies: US Political Risk Hammers US Dollar
US political uncertainty hammers US dollar
On Tuesday, EUR/USD cleared the 1.1023 resistance. The move was due to USD weakness on recent Trump-related issues and on disappointing US data. At the same time, sentiment on the euro remained constructive. EUR/USD closed the session at the 1.1083. The loss of USD/JPY remained modest as US equities remained resilient despite the political noise, at least during the regular hours. USD/JPY finished the day at 113.12.
Overnight, sentiment turned risk-off on headlines that president Trump asked FBI director Comey to stop an investigation against Trump’s former national security adviser. The Asian equity losses are modest, but the decline in US equity futures suggests that this case might have more impact than recent ones. The yen plays its safe haven roll. USD/JPY declined to the mid 112 area. Japanese machine orders were weaker than expected, but the focus for yen trading was on US politics. Dollar weakness propelled EUR/USD north of 1.11.
There are no US eco data today. In EMU, only the final HICP inflation report will be released. The impact on FX trading will be limited. The focus for global trading will be on the last flaring up of political turmoil in the US. There were already several ‘issues’ on Trump that caused high profile press headlines, but until now, the impact on markets was negligible. The jury is still out, but we think that the overnight report of the NYT might be more important than previous incidents. It risk delaying or even aborting the implementation of a coherent policy an tax, deregulation on other issues that are important for markets. US equities were incredibly resilient of late, but this might be the trigger for a more bumpy ride.
On the currency markets, such a scenario should favour the safe havens like the yen and, to a less extent, the Swiss franc. The USD negative sentiment also support more EUR/USD gains. There is no reason to row against EUR/USD uptrend, but a reversal in the EUR/JPY rally might also slow the rebound of EUR/USD. So, even if political tensions in the US deepen, the EUR/USD rally might slow.
Short term assessment
From a technical point of view, the USD/JPY rebound ran into resistance last week. Till yesterday it was not more than a correction on a 6-big figure rally. However, the pair is nearing the previous top/break-up area at 112.20 Return action below this level would indicate that the recent uptrend is aborted and that further return action in the 108.13/114.37 range is possible. We amend our short-term assessment on USD/JPY from positive (buy-on-dips) to neutral with downside risks.
Last week, it looked that EUR/USD could revisit the 1.0821/1.0778 support (gap). However, Friday’s US data and political uncertainty finally propelled EUR/USD north of the 1.0821/1.0778 to 1.1023 range. This break improved the technical picture. Next resistance stands at 1.1120 (62% retracement) and at 1.1366 (correction top).
EUR/USD: euro breaks topside of the ST range as US political uncertainty weighs on the dollar
EUR/GBP
EUR/GBP jumps on broad based euro strength
Yesterday, UK April inflation (2.7% Y/Y) and core inflation (2.4% Y/Y) rose more than expected. However, the data didn’t help sterling. EUR/GBP pierced the 0.8509/31 resistance after the CPI data. The technical break and broad-based euro strength reinforced EUR/GBP buying. There was probably also an aspect of sterling weakness. A decision of the EU Court of Justice that the free-trade agreement between the EU and Singapore needs approval of the national parliaments, raising the chance that national parliaments will have an important say in the approval of a post-Brexit EU-UK trade deal. EUR/GBP closed the session at 0.8593 (from 0.8510). Cable showed no clear trend and closed the session at 1.2917. However, sterling hardly gaining ground against a struggling dollar is a sign of sterling weakness.
Today, UK labour market data will be published. For now, there is no big impact expected of cooling growth on the labour market. The markets is still a bit more sensitive to negative rather than to a positive news. The wage data are a wildcard. A substantial positive surprise in wages might be slightly supportive for sterling. However, this is not our favoured scenario. Of late, the positive sterling sentiment eased and euro strength prevailed in EUR/GBP trading. For now, we don’t row against the EUR/GBP uptrend. 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. The breach of 0.8509/31 (previous ST tops) improved the technical picture. We continue to prefer a EUR/GBP buy-on-dips approach. Longer term, Brexit remains potentially negative for sterling.
EUR/GBP: jumps north of ST range top
