Sunrise Market Commentary
- Rates: Downward potential Bunds on ECB meeting?
Bunds gained significant ground in the run-up to today’s ECB meeting, suggesting that the market reaction could be asymmetric with lower Bunds (higher rates) both in case of a hawkish ‘surprise’ (our scenario; change forward guidance and risk assessment eco outlook) and in case of a more neutral ECB (via buy-the-rumour, sell-the-fact). - Currencies: ECB and Comey hearing to decide on nest USD move?
Today, the ECB may be slightly more hawkish in its policy assessment, but it likely won’t be enough to trigger sustained EUR/USD gains beyond the 1.1300/66 resistance. The outcome of the UK elections won’t be available today, but market anticipation on a May victory might be slightly supportive for sterling
The Sunrise Headlines
- US equities recovered from a mid-session dip and eventually closed with small gains. Overnight, most Asian stock markets show similar gains. Local eco data didn’t impact trading.
- President Trump asked Comey for ‘loyalty’ over the ‘Russia thing’. Comey said Trump had also urged him to drop any investigation related to former national security adviser Flynn having lied about talks with the Russian ambassador.
- China reported stronger-than-anticipated exports and imports for May despite falling commodity prices, suggesting the economy is holding up better than expected despite rising lending rates and a cooling property market.
- Oil prices were hit hard yesterday after data showed an unexpected rise in US petroleum stocks and a sharp turn lower for petrol and diesel use. Brent crude fell from $50/barrel to around $48/barrel, testing important support.
- Japan’s economy grew at slower pace than initially estimated in Q1 (0.3% Q/Q), as an inventory rundown and weaker household spending took some of the shine off Japan’s longest economic expansion since 2006.
- Turkey threw its weight behind its ally Qatar, fast-tracking plans to deploy extra Turkish troops to the emirate as Arab rivals cut transport links and supply lines.
- Today’s eco calendar is mainly filled with events: the ECB meeting, UK elections and the Comey hearing. Eco data include US weekly jobless claims and final EMU GDP data. Ireland taps the bond market
Currencies: ECB And Comey Hearing To Decide On Nest USD Move?
ECB and Comey to decide on next USD move?
Yesterday, the dollar first traded in the defensive as investors pondered the impact of today’s key events, including the Comey testimony, the ECB policy statement and the UK elections. Risk sentiment improved later on and avoided more USD losses. Later in the session, rumours on a softer ECB inflation forecast triggered a modest setback of the euro. EUR/USD finished the session at 1.1257. USD/JPY closed at 109.82, supported by a good close on US equity markets.
Overnight, Asian equities are trading with modest gains. Eco data are mixed. Japan Q1 GDP was revised sharply lower confirming that the BOJ will continue its accommodating policy. The impact on the yen is neglible. USD/JPY tested the 110 barrier this morning, but returned to 109.50 area as the equity momentum eases. The China May trade surplus narrowed. Exports (15.5% Y/Y) and even more imports (14.8% Y/Y vs 8.3% Y/Y ) were higher than expected. The import data suggest ongoing good growth in Q2. This is often a positive for the Aussie dollar, but not today. AUD/USD stabilizes in the 0.7550 area after this week’s rebound. EUR/USD also trades little changed in the 1.1250 area.
Today, the focus will be the ECB press conference and the Comey hearing. The first indications of the outcome of the UK election will only come after the market closure. For an in depth analysis of the ECB see the fixed income part of this report. Interest rate markets are positioned for limited/no change in the ECB’s guidance. So, any indication of a step direction exit non-conventional policy might push EMU yields higher. At the same time, the euro had a good run of late (reduced political risk & USD softness). So, the positioning in the FX market might be different from that in the interest rate markets. In our working hypothesis, the ECB will move to balanced eco risks. The forward guidance might be slightly less easy. The ‘big work’ might be postponed to September. Nuances will decide on the EUR/USD reaction, but we tend to believe that the ECB has to be quite hawkish to inspire a next EUR/USD up-leg. The Comey testimony is a wildcard, but we assume that it won’t bring really big trouble for Trump. Such a scenario might be modestly USD supportive . Several other combinations of events are possible, but for now we assume that it will be difficult for EUR/USD to move sustainably above 1.1300/66.
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. The post-payrolls USD and the break below 110 made the picture further 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 US 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 near key resistance ahead of key events
EUR/GBP
Sterling regains slightly ground ahead of the election
Sterling was in consolidation modus yesterday. Trading in the major sterling cross rates was confined to relatively tight ranges given the magnitude of the upcoming event risk. Cable held a tight range around, but mostly slightly north of 1.29 suggesting a tentative sterling positive momentum. The same applies to EUR/GBP. The pair dropped below the 0.87 mark. This was primarily a euro correction on the ECB’s inflation rumours, but in a second degree also because of a better bid for sterling. EUR/GBP closed the session at 0.8687. Cable finished the day at 1.2960.
Today, sterling traders will look out for the outcome of the Parliamentary elections. The first indications on the outcome will only be available after the close of the markets. If markets, for one reason or another, would anticipate for a scenario of May reaching a (slightly ) bigger majority, it should be slightly supportive for sterling. In this context, a break of EUR/GBP beyond the recent top might become 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 would suggest that the worst is over for sterling.
EUR/GBP: most of the bad news for sterling discounted?
