Sunrise Market Commentary
- Rates: Investors side-lined ahead of key US releases tomorrow and on Friday?
Today’s market remains well-filled. We mainly focus EMU inflation. Risks, if any, are on the downside of consensus, but markets should be prepared after the slightly larger setbacks in German and Spanish inflation yesterday. We hold a rather neutral view with investors probably side-lined ahead of key US eco releases tomorrow and on Friday. - Currencies: Sterling remains in the defensive as election uncertainty mounts
The dollar and the euro are captured in some kind of balance of mutual softness. A soft EMU inflation figure might be slightly negative for the euro, but probably won’t change the broader picture. Sterling might remain under pressure as opinion polls indicate that it isn’t 100% sure that PM May’s conservative party will secure a majority in the June election
The Sunrise Headlines
- US stock markets ended up to 0.25% lower. Main indices flat-lined after a softer opening. Overnight, most Asian bourses eke out small gains with Japan underperforming.
- Federal Reserve Governor Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and US growth looks poised to rebound.
- Growth in activity at China’s manufacturers was unchanged in May, with the official PMI remaining at the lowest level since September (51.2), but defying expectations of a drop. The non-manufacturing PMI rose from 54 to 54.5.
- British PM May’s Conservative Party risks falling short of winning an overall majority of seats in parliament in a national election on June 8, The Times newspaper said, quoting research by polling firm YouGov.
- The Reserve Bank of New Zealand said risks at home and abroad to the country’s financial system had receded in recent months, but it remained wary of any rise in house prices or global protectionism.
- The Pentagon conducted a successful test of a system designed to shoot down an intercontinental ballistic missile, US defence officials said, a demonstration that came amid rising tensions over North Korea’s nuclear weapons program.
- Today’s eco calendar heats up containing EMU CPI, EMU unemployment rate, Chicago PMI and US pending home sales. ECB governors Coeure, Visco, Lautenschlaeger and Fed Kaplan speak. The Fed releases its Beige Book.
Currencies: Sterling Remains In The Defensive As Election Uncertainty Mounts
Euro and dollar feel mutual softness
Different themes guided trading in the major FX cross rate yesterday. Eeuro weakness prevailed early in the session as markets pondered whether EMU political risk (Italy/Greece) would again become an issue for trading. However, the euro found its composure even as EMU data were slightly softer than expected. US data were also mixed to slightly softer than expected, putting the dollar again in the defensive later in US dealings. EUR/USD closed the session at 1.1186. USD/JPY even finished the day below the 111 mark (110.85).
Overnight, Asian markets show again a diffuse picture. Chinese equities opened strong as investors return after holidays. Early gains were supported by better than expected China PMI’s, but the gains are evaporating. Japan underperforms. USD/JPY is holds in the 111 area. End of month USD buying from US importers is said to prevent a further decline, for now. EUR/USD drifts south in tight 1.1190/65 range.
The eco calendar is again well filled today. The EMU headline CPI is expected to decline from 1.9% Y/Y to 1.5% Y/Y in May. The core measure is expected to soften to 1.0%. The EMU unemployment rate is expected to decline further from 9.5% to 9.4. In the US, the volatile Chicago PMI (expected 57.0 from 58.3) and the pending home sales will be published.
Over the previous days, the dollar and the euro were captured by a balance of mutual weakens. US eco data couldn’t convince. Fed speakers confirmed the case for a June rate hike, but further rate hikes might be delayed if inflation eases further. On the EMU side of the story, the ECB also maintains a soft tone. The ECB’s case is supported by soft EMU inflation data. EMU political event risk lingers in the background. We don’t expect today’s data to be a game-changer for EUR/USD trading. If anything, a below consensus EMU CPI might be slightly negative for the euro. For now, corrections on the equity markets remain modest, but if sentiment turns risk-off, we think that it will also be a slightly euro negative (via EUR/JPY). In a daily perspective, we assume that the 1.1205/1.1268 area will be tough resistance for the euro
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.
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 tough. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: markets await key US eco data later this week
EUR/GBP
Growing uncertainty on a May victory weighs on sterling
Sterling selling eased (temporary) yesterday morning, digesting recent substantial losses after opinion polls indicated that that the lead of the conservative party in parliamentary election could be much smaller than assumed of late. EUR/GBP dropped to the 0.8655 area. Cable touched an intraday top in the 1.2885/90 area. However, sterling momentum dwindled again during the US trading session as political uncertainty lingered. There were no important eco data in the UK yesterday. EUR/GBP closed the session at 0.8699. Cable finished the day at 1.2859.
Overnight, a YouGov poll suggested that the conservative party is at risk to lose its majority in Parliament. Cable dropped to the 1.28 area. EUR/GBP rebounded well north of 0.87. GFK consumer confidence unexpectedly improved from -7 to -5, but this hardly helped sterling. Later today, the UK money Supply and lending data will be published, but they will be of second tier importance for sterling trading. The focus will remain on politics. The YouGov poll has a big margin of error, but won’t go unnoticed on European/UK markets this morning. Yesterday, it looked that the EUR/GBP rally was ripe for a pause as selling pressure on sterling eased and as the euro was in the defensive. One day later, fortunes have changed again. A retest of the 0.8750 correction top might be on the cards, especially if uncertainty on the outcome of the June 8 election grows further. There is no reason to row against the sterling negative tide. Next resistance comes is 0.8788
EUR/GBP nears recent highs as election uncertainty grows
