Sunrise Market Commentary
- Rates: Event risk left no traces on Bunds/Treasuries
Markets can digest the ECB meeting and the outcome of the UK elections today. The passive initial reactions suggest that focus will turn to next week’s Fed meeting though. Ahead of the weekend and with this week’s three event risks out of the way, investors might take some chips off the table and close some long positions in Bunds/US Treasuries. - Currencies: Sterling hammered as UK election results in a hung Parliament
Overnight, sterling fell off a cliff as UK PM May failed to secure a parliamentary majority. EUR/GBP is nearing the 2017 top. In EMU and in the US, the calendar is thin. The dollar bottomed out yesterday, but we don’t see a trigger for sustained further gains right now. Next week, the focus for USD trading will shift to the Fed meeting
The Sunrise Headlines
- US equities ended close to unchanged and weren’t affected by Comey’s testimony. Overnight, Asian stock markets are mixed. The UK’s election disaster doesn’t impact global market sentiment.
- Britain’s general election has resulted in a hung parliament. The Conservatives will be the largest party in the Commons followed by the Labour party who are the biggest winners in another shock night for British politics.
- Former FBI Director Comey told senators that he felt President Trump had directed him to drop an investigation into a former adviser, and that after his firing he leaked accounts of his conversations with the president in hopes of sparking the appointment of a special counsel.
- China’s PPI eased for the third straight month in May on tumbling prices of raw materials, signalling a broader cooling in economic activity as profits are squeezed by slackening domestic demand and rising financing costs.
- US House Republicans approved a sweeping bill ripping up major aspects of the Dodd-Frank Act. The legislation has little chance of passing the Senate in its current form as this would require support from Democrats.
- Banco Popular burnt through €3.6bn of emergency central bank funding in the first two days of this week as the Spanish lender suffered the eurozone’s first large scale bank run, according to two people involved in the situation.
- Today’s eco calendar is thin with only UK industrial production. ECB Nowotny and Rimsevics are scheduled to speak
Currencies: Sterling Hammered As UK Election Results In A Hung Parliament
Dollar and euro little changed on UK election result
Yesterday, the focus for global (currency) trading was on the ECB policy decision and on the testimony of former FBI chief Comey. The ECB made only a small incremental step to policy normalisation. Markets were positioned for a slightly bigger step. The euro lost modest ground and dropped temporary to the 1.12 area. The hearing of Comey had no main negative impact on the dollar. EUR/USD closed the session at 1.1214. USD/JPY made a comeback, closing the day at 110.02.
Overnight, Asian equities are trading mixed. The UK election result is dominating the headlines, but understandably it is no big issue for Asian trading. The China May CPI rose in line with expectations. USD/JPY is little changed at 110.15. EUR/USD lost a few ticks as cable sold off early in Asia, but changes are also limited. The pair trades again in the 1.12 area.
The eco calendar in Europe and the US is uneventful. The focus is on the UK election outcome that raises a lot uncertainties on the Brexit negotiations. However, we see no major negative consequences for Europe or the euro. If anything, the tactical position of Europe in the negotiations is probably strengthened. So, with the ECB meeting and the Comey testimony out of the way, we expect technical, order driven trading for EUR/USD and USD/JPY. Next week, the focus will turn to the Fed meeting, but we doubt it will already play a big role today.
Yesterday, the dollar showed tentative signs of bottoming out process. In a daya- day perspective, we are neutral on USD/JPY . EUR/USD might feel some slight downward pressure after yesterday’s soft ECB. A further sharply decline of cable, if it would occur, might be temporary a marginal negative for EUR/USD, but we don’t expect it to be lasting or significant. We still think that topside in EUR/USD is tough.
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 sell-off below 110 deteriorated the picture further. The pair declined further in the 108.13/114.37 range. Over the previous days, the USD/JPY decline slowed. However, there is no convincing sign of a U-turn yet.
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 no sustained follow-through gains occurred. 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 topside test rejected, but correction remains very modest
EUR/GBP
Sterling falls off a cliff
Sterling traders had quite a boring trading session yesterday as markets awaited the outcome of the UK Parliamentary election. Especially EUR/GBP trading initially developed in a tight range below 0.87. Remarkably, EUR/GBP was hardly affected by the EUR/USD decline during the ECB press conference. On the other hand, cable to a large extent followed the EUR/USD decline even as this move was mainly ECB-driven. At the end of the day, sterling was slightly better bid . EUR/GBP closed the session at 0.8657. Cable finished the day at 1.2956.
Today’s UK production and trade balance data will almost surely be ignored. The election outcome (hung Parliament) hammered sterling. Cable trades in the 1.27 area. EUR/GBP tries to sustain north of 0.88 and is nearing the 2017 top. A hung Parliament is probably the worst scenario for the UK going into the Brexit negotiations. It is highly uncertain how the negotiations will evolve. This high degree of uncertainty makes a BoE rate hike highly unlikely even as inflation might rise further due to the selloff of sterling. This is a negative context for sterling. At this stage, it is not sure whether the election outcome raises or reduces the probably of a hard Brexit. If, at some point, chances on a softer Brexit would rise, fortunes might improve for sterling. However, in a first reaction, we can’t but join the sterling negative sentiment.
From a technical point of view, EUR/GBP broke above 0.8774 resistance. Next resistance comes in at 0.8854 (2017 top). A break beyond would open the way to the 0.90 area. A return below the 0.8655 correction low would be an indication that the pressure on sterling is easing.
EUR/GBP: nearing the 2017 top as sterling sells of after UK elections
