Sunrise Market Commentary
- Rates: Sideways ahead of big events on Thursday?
The eco calendar lacks impetus for trading today and tomorrow, suggesting investors will be side-lined ahead of Thursday’s big events (ECB meeting, UK election, Comey hearing). The developing crisis in the Gulf region is a wildcard which could influence bond markets via equity markets or oil prices. - Currencies: Dollar continues to struggle; USD/JPY slips below the 110 barrier
Friday’s poor US payrolls report kept the dollar in the defensive. This morning, USD/JPY fell below the psychological barrier of 110. FX traders are looking forward that Thursday’s multiple event-risk with the UK election, ECB meeting and the hearing of former FBI director Comey. Risk aversion might be negative for USD/JPY, but more neutral for EUR/USD.
The Sunrise Headlines
- US equities traded near opening levels during yesterday’s trading session and eventually closed slightly lower. Overnight, Asian stock markets are mixed with Japan underperforming (-0.5%) on a stronger yen.
- Saudi Arabia blamed the tiny Persian Gulf emirate of Qatar for “financing, adopting and sheltering extremists”. Egypt, the UAE, Yemen and Bahrain joined Saudi Arabia in breaking diplomatic and some commercial ties with Qatar
- Industries making up the bulk of the US economy continued to expand at a solid pace in May, adding to signs of steady growth this quarter. The May non-manufacturing ISM printed at 56.9 (vs 57.1 consensus), down from 57.5.
- Australia’s central bank kept its policy rate at 1.5% amid growing concerns on the eco outlook. Conditions on the housing market still vary considerably, but there were signs the brisk rises in some markets were “starting to ease.”
- IMF Lagarde has offered a way out of the impasse over Athens’ debts that would allow the EMU to release the next aid tranche. She suggested agreeing a deal whereby the IMF would stay on board in the bailout, as Berlin wants, but not pay out further aid until debt relief measures are clarified.
- President Trump will meet with House and Senate leadership today to plot a path forward on health care and tax reform—two of the administration’s top legislative priorities that have been stalled in recent months.
- Today’s eco calendar is very thin with only EMU retail sales and bond auctions in Austria and Germany (inflation-linked).
Currencies: Dollar Continues To Struggle, USD/JPY Slips Below The 110 Barrier
Dollar struggles; USD/JPY drops below 110 barrier
Trading was mostly technical in nature yesterday. EMU and US eco data had only a limited impact on FX trading. EUR/USD failed to extend its payrolls’ gains. The pair even fell prey to modest intraday profit taking in thin trading. EUR/USD closed the session at 1.1254. USD/JPY hovered in a tight range near the post-payrolls lows as equities traded with a cautious negative bias. There was no additional negative fall-out on USD/JPY though. The pair closed the day at 110.45, almost unchanged from Friday.
Overnight, Asian stock markets trade cautiously negative with Japan underperforming. USD/JPY dropped below the post-payrolls lows, triggering additional yen buying. The pair fell below the psychological barrier of 110 to currently trade in the 109.70 area. USD/JPY’s decline also weighs slightly on the dollar against the euro. The pair returned to the 1.1275 area, but for now the recent top stays out of reach. The decline of EUR/JPY is helping to cap further gains. The Reserve Bank of Australia as expected left its policy rate unchanged. The Aussie dollar lost temporary ground in lockstep with USD/JPY’s decline overnight, but rebounded after the RBA decision. The RBA didn’t profoundly change its assessment on the economy.
The eco calendar is almost empty today. Global factors and upcoming event risk will set the tone for FX trading. Markets will especially look forward to Thursday, with the UK Parliamentary elections, the ECB policy meeting and the testimony of former FBI director James Comey to a Senate committee. Political or other event risk mostly only had a temporary impact on global trading recently. This might again be the case this time, but some investor caution is likely until the uncertainty is out of the way. We expect USD/JPY to remain in the defensive short-term. The picture for EUR/USD might be a bit different. The ECB might make some amendments on its forwards guidance and could remove the downside risks to the economy outlook. As such this could be a precursor for more important action in September. Looking at the recent euro rally, a modestly positive change in the ECB’s assessment is probably already discounted. This might cap further EUR/USD gains. Some ST squaring of positions/profit taking is possible. A cautious risk-off sentiment and the decline of EUR/JPY makes further EUR/USD gains less easy. We keep a neutral bias on EUR/USD and don’t preposition for further gains
Technical picture
The USD/JPY rally ran into resistance in early May. A mini sell-off pushed the pair below the previous top (112.20), making the short-term picture negative. At the end of last week, there were tentative signs that the decline could slow. However, the post-payrolls decline and this morning’s break below 110 are making the picture again outright negative. Return action lower in the 108.13/114.37 range remains possible.
Earlier May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and political upheaval propelled EUR/USD north of the 1.1023 range top. The pair initially reached a short-term correction top at 1.1268. There was a minor break after Friday’s disappointing US payrolls, but for now there are no follow-through gains. The Trump top/correction top at 1.1300/1.1366 is next resistance. USD sentiment will have to be quite negative to clear this hurdle short-term. For now, we don’t preposition for a sustained break of this area. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD holding near the post-payrolls top, but no follow-through gains
EUR/GBP
Sterling decline to slow ahead of the election?
Yesterday morning, sterling trade went into the defensive after the terrorist attack in London. However, the losses were modest and sterling soon returned to levels last seen at the end of the previous week. The UK services PMI declined more than expected from 55.8 to 53.8, but the report was largely ignored as an important factor for sterling trading. Quite the reverse, in technical trade, the UK currency even regained ground gradually later in the session. EUR/GBP closed the session at 0.8721. Cable finished the day at 1.2904.
Overnight, the BRC like-for-like sales declined slightly more than expected (-0.4% Y/Y), but we didn’t see any lasting impact on sterling trading. There are no other important eco data in the UK today. Markets will try to get some insight on the potential impact of the terrorist attack on the outcome of Thursday’s election. The lead of the conservative party is declining, but they are still in pole position. We don’t expect a sustained rebound of sterling, but some profit taking of sterling shorts going into the final stage of the election is possible. So, a break of EUR/GBP beyond the recent top might become more difficult. First resistance comes in the 0.8774/88 area. EUR/GBP 0.8655 is a first minor support. A sustained return below the EUR/GBP 0.86 alert would suggest that the worst is over for sterling
EUR/GBP: most of the bad news for sterling discounted?
