Sunrise Market Commentary
- Rates: Inflation key, but investor’s won’t lose their nerves
Today’s calendar heats up. We focus on German (CPI) and US (PCE) inflation readings. Markets will probably be most sensitive to hawkish surprises in EMU and dovish ones in the US. This week’s backloaded eco calendar suggests that investors’ won’t rush into hurried conclusions though. Sentiment on EMU bond markets is a wildcard for trading. - Currencies: EUR/USD declines on soft Draghi comments and return of political risk
Yesterday and this morning, the euro was in the defensive as soft Draghi comments and uncertainty on Greece and Italy provided a good reason to take further profit on the recent EUR/USD rally. Today, the focus will be on price data in the US and Germany. The euro looks more vulnerable than the dollar if sentiment turns risk-off
The Sunrise Headlines
- US and UK investors return from the long weekend today after yesterday’s Memorial Day and Spring Bank Holiday. Overnight, Asian stock markets trade mixed.
- Big banks are throttling back from the $1.2T US car loan market, fearing that consumers have taken on more debt than they can handle. Data released last week showed the 1st sequential drop in car loans outstanding in at least 6 years.
- Japan’s unemployment rate held steady at 2.8% in April, at a 23-yr low. Japan’s household spending pushed further into contraction, but retail sales rose at a faster rate thanks to a boost from department stores and supermarkets sales.
- St. Louis Fed Bullard says jury is still out on whether government policies will meet expectations that have been priced into equity markets.
- Greece’s government is preparing to possibly go without next bailout payment if creditors don’t agree on debt relief for the country, Bild reports, without saying where it obtained the information.
- North Korea’s latest missile launch is its 3rd apparent breakthrough in missile technology in less than 3 weeks. Kim Jong Un expressed the conviction that it would make a greater leap forward in the spirit to send a bigger ‘gift package’ to the Yankees in retaliation for American military provocation, according to KCNA.
- Today’s eco calendar heats up with EC confidence data, German (CPI) and US (PCE) inflation readings, US personal income/spending data and consumer confidence. Italy taps the market and ECB Liikanen and Fed Brainard speak
Currencies: EUR/USD Declines On Soft Draghi Comments And Return Of Political Risk
EUR/USD eases further off last week’s top
Trading in EUR/USD and USD/JPY was confined to tight ranges yesterday with US and UK markets closed. ECB’s Draghi maintained a soft approach in his appearance before the EU parliament. EUR/USD reversed modest gains after Draghi’s testimony. EUR/USD closed the session at 1.1164, near the intraday low. USD/JPY finished an uneventful session at 111.27.
Overnight, Asian markets started with a cautious risk-off bias, but the losses are limited and eased as the session proceeds. Chinese markets are closed. Japanese eco data were mixed. The jobless rate (2.8%) is holding at a multi-year low and the Job-to-applicants ratio rose to the highest level since 1974. For now the favourable job market didn’t lead to a pick in consumer spending. The yen holds strong. USD/JPY dropped below 111 and is testing last week’s low. The move is in the first place due to the cautious risk sentiment, but Japanese factors might also play a secondary role (recent rise in short-term yields, decent eco data). The USD/JPY decline also pressured EUR/JPY (123.40) and EUR/USD (1.1130).
The eco calendar is well filled today. Confidence data from the European Commission are expected to confirm the improvement seen in other confidence indicators. German CPI is expected to decline 0.1% M/M to be up 1.5% Y/Y (from 2.0% in April). The swings are partially driven by technical factors, but a decline in German/EMU inflation might be seen as supporting the case for a cautious ECB approach. In the US, the personal income and spending data are expected at a decent 0.4%, but the deflators are expected slightly softer from March (1.7% from 1.8 for the overall deflator). US consumer confidence (conference board) is expected to decline slightly from a very high level
The price data (both in the US and Europe) and global risk sentiment are probably key for global/FX trading today. We don’t expect the US data to be that poor that they will question a June Fed rate hike. Soft German inflation data have the potential to reinforce the recent euro correction. EMU political risk is also again on the radar (speculation on Italian elections and Greece looking for confirmation on debt relief). The soft Draghi comments might have a slightly negative impact on the euro.
So, the EUR/USD correction off last week’s top might continue. USD/JPY, EUR/JPY and EUR/USD might feel more downside pressure if sentiment turns more risk-off.
Of late, the dollar traded soft. US data were a bit disappointing, markets turned more cautious on Trump’s pro-growth agenda and US yields declined, keeping the dollar in the defensive. At the same time, the euro profited of reduced political risk on the region. This picture hasn’t profoundly changed, but last week, there were tentative signs that the dollar decline could slow. Is enough USD softness discounted? This week’s payrolls and manufacturing ISM might be important in this assessment. At the same time the euro positive momentum is also fading.
Technical picture
The USD/JPY rebound ran into resistance early May. A mini-sell-off pushed the pair back below the 112.20 previous top and made the short-term picture negative. Return action lower in the 108.13/114.37 range is possible.
Earlier this month, it looked that EUR/USD could revisit 1.0821/1.0778 support (gap). However, poor US data and political upheaval finally propelled EUR/USD north of the 1.1023 range top. The pair reached a short-term correction top at 1.1268. The correction top at 1.1300/1.1366 is next resistance. USD sentiment will have to be extremely negative to clear this hurdle short-term. Further ST EUR/USD gains might become tougher. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: correction off last week’s top continues on soft Draghi comments and as EMU political risk returns to the radar
EUR/GBP
Focus for sterling trading remains on the opinion polls
UK markets were closed for the Spring bank holiday yesterday. Markets are keen to see whether PM May’s conservative party can stop the erosion of its lead in the opinions polls for the June 08 elections. Political uncertainty didn’t cause additional harm on sterling yesterday even as polls during the weekend confirmed the narrowing gap with Labour. Cable closed a thinly traded session at 1.2840. EUR/GBP finished the day at 0.8695. Post-Draghi euro softness also weighed slightly on EUR/GBP.
There again no important eco data in the UK today. Focus will remain on the UIK political scene. Uncertainty on the lead of the conservative party is a negative for sterling short-term. Contrary to what was the case of late, this might in the first place be visible in cable (rather than in EUR/GBP). The picture for EUR/GBP is more mixed as the single currency is also in the defensive. EUR/GBP trades off last week’s top in the mid 0.87 area. Further consolidation/correction on the May rally might be on the cards
EUR/GBP: euro weakness dominates even as UK political uncertainty continues to play a role
