Sunrise Market Commentary
- Rates: US yields test 2017 lows
Risk sentiment on equity markets will probably be the main driver ahead of tomorrow’s key events. The US 5-yr (1.69%), 10-yr (2.17%) and 30-yr (2.82%) yield are testing key support levels. The boost in US inflation expectations after Trump’s election victory is completely erased as markets question his ability to implement his promised fiscal stimulus. - Currencies: Dollar holds near recent lows against euro and yen
A modest risk-off session pressured core bond yields and weighed on the dollar yesterday. Markets will continue to count down to tomorrow’s multiple event risk. After the recent euro rebound, a modestly positive change in the ECB’s assessment should be discounted in the euro. Is this enough to prevent a break beyond the 1.1300/66 resistance?
The Sunrise Headlines
- Caution is still the key word on the markets this morning. Yen is stabilizing near highest level in a month and gold is holding its gains. Reluctance to add to risk positions is high.
- Australian GDP growth is largely in line with expectations. GDP grew by 0.3% Q/Q % in Q1, down from a 1.1% Q/Q in Q4 2016. The Aussie dollar climbed to 1.326 USD, continuing its recent up-move and putting bullish double bottom on the charts.
- The American JOLTS-figure reached record high in April. The data suggest that the recent slowdown in the pace of nonfarm payrolls hiring stems from skills gaps rather than increased layoffs.
- Trump yesterday uttered support for the Saudi-led diplomatic isolation of Qatar. He called it punishment for the country’s financial support for Islamic extremists. Trump’s staff members were however quick to soften the stance.
- Brent oil gained about 1 USD per barrel yesterday evening but halted gains around 50 USD/barrel as US industry data showed gasoline stockpiles expanded.
- IMF proposal offering a way out of Greece’s debt impasse was shot down by the Greek government yesterday because it pushes back debt decisions again as the IMF would only pay out aid after debt relief measure are clarified.
- Today calendar is light but Super Thursday with FBI chief Comey testimony, ECB policy gathering and UK elections just around the corner
Currencies: Dollar Holds Near Recent Lows Against Euro And Yen
Dollar near recent lows against euro and yen
There were no important data or events to guide FX trading. The yen outperformed on investor caution ahead of the key event risks later this week. USD/JPY dropped below the 110 barrier and closed the session at 109.41. EUR/USD dropped to the mid 1.1250 area in Europe, but USD weakness again dominated later in US dealings. EUR/USD revisited the recent top and closed the session at 1.1277.
Overnight, regional Asian indices trade slightly positive with China outperforming as the recent CNY rally slows. Investors continue looking forward to tomorrow’s events with market moving potential, including the testimony of former FBI director Comey. USD/JPY is trading in the 110.50/60 area, slightly off yesterday’s correction low (109.23). The dollar also remains in the defensive against the single currency (EUR/USD 1.1265). The Australian Q1 GDP was close to expectations at 0.3% Q/Q and 1.7% Y/Y. Still, the report was strong enough to extend the recent rebound of the Aussie dollar. AUD/USD trades in 0.7540 area (compared to sub- 0.74 levels at the end of last week).
The eco calendar is again extremely thin today. The OECD economic outlook will inspire some headlines, but it won’t be a game-changer for trading. In the run-up to tomorrow’s ECB meeting/staff projections, investors might keep an eye at the EMU inflation projection. A soft forecast might be slightly negative for the euro. Global factors and upcoming event risk will (Comey testimony, ECB and UK election) will again dominate FX trading. Investor caution weighed on core bond yields and on the dollar yesterday. We expect more wait-and-see trading today, maybe with a slight risk-off bias. In this context, a meaningful USD/JPY rebound is unlikely, even as quite some caution is probably discounted after the recent decline. Regarding EUR/USD, we advocated yesterday that a modestly positive change in tomorrow’s ECB’s assessment is probably already discounted. Even so, the euro remains well bid going into tomorrow’s ECB meeting. USD weakness dominates. We maintain the working hypothesis that there is no real big case for EUR/USD to trade sustainably above 1.13/1.1366 unless there comes high profile negative news from the US or unless the ECB makes a really hawkish U-turn. We don’t preposition for either of these scenario’s
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 yesterday’s break below 110 made the picture again outright negative. Return action lower in the 108.13/114.37 range remains possible.
Earlier in 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 sustained 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. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD continues to challenge the post-payrolls top
EUR/GBP
Sterling in wait-and-see modus ahead of UK election
Yesterday, there was no clear story to guide sterling trading. The UK currency slightly regained ground against the euro, but that move also mirrored a temporary euro setback. EUR/GBP dropped to the 0.87 area but soon found a bottom. There was no change in the election story. The Conservative Party maintained a (reduced) lead. Later in the session, some modest sterling pressure resurfaced. However, this was technically insignificant. EUR/GBP closed the session at 0.8734. Cable closed the session just north of 1.29.
Today, the UK eco calendar only contains the Halifax house prices, but we don’t expect this to be a market mover. The focus will remain on tomorrow’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 remains 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?
