Sunrise Market Commentary
- Rates: Upcoming Fed meeting will keep investors sidelined
Today’s eco calendar becomes more interesting with German ZEW and US NFIB small business optimism, but we don’t expect them to influence markets ahead of the Fed meeting. Risk sentiment will remain key for trading, but we think the Bund and US Note future will remain within established ranges. - Currencies: USD holds stable going into the FOMC decision
The dollar was slightly in the defensive yesterday as the tech equity correction weighed. Sterling tested recent lows against the euro and the dollar as political uncertainty persisted. Today’s data will only be of second tier importance for USD trading. We assume investors won’t be too much USD short going into the FOMC meeting.
The Sunrise Headlines
- US technology stocks were under further pressure despite a late recovery from the day’s lows. Nasdaq ended 0.5% lower while losses on other US indices remained small. Overnight, most Asian stock markets eke out small gains.
- EMU finance ministers and the IMF are likely to strike a compromise on Greece on Thursday, paving the way for new loans for Athens while leaving the contentious debt relief issue for later, officials said.
- The US Treasury Department unveiled a sweeping plan to upend the country’s financial regulatory framework, which, if successful, would grant many items on Wall Street’s wishlist.
- An attempt to revive formal Dutch coalition talks on a four-party tie-up involving the Greens broke down. Talks collapsed over immigration policy, as they did in a previous bid four weeks ago.
- Theresa May has apologised to Conservative MPs for her election campaign that left her without a Commons majority and facing new Tory divisions on Europe, declaring: “I got us into this mess and I’m going to get us out of it.”
- The Bank of Canada will assess whether it needs to keep interest rates at near-record lows as the economy continues to grow, BoC Wilkins said, raising the prospect that a rate hike could come sooner than anticipated. CAD profited.
- Today’s eco calendar is interesting with the German ZEW survey, UK (CPI) and US (PPI) price indicators and US NFIB small business optimism. The Netherlands, Italy and the US supply the market while ECB Weidmann speak
Currencies: USD Holds Stable Going Into The FOMC Decision
Dollar holding tight ranges ahead of the Fed.
Yesterday, the tech-driven equity correction and declining European political risk were the drivers for FX trading. Negative risk sentiment weighed slightly on USD/JPY. The pair struggles not to fall back below 110 (close at 109.95). EUR/USD traded sideways, as more signs of European political stability protected the downside of the single currency and counterbalanced negative global risk sentiment. EUR/USD finished the day at 1.1203.
Overnight, Asian equities recoup part of the yesterday’s losses as the US driven tech correction eases. We didn’t see high profile news in Asia to guide trading. USD/JPY tries to regain the 110 barrier. EUR/USD lost a few ticks and is changing hands in the 1.1190 area. Yesterday evening, Bank of Canada Deputy Governor Carolyn Wilkins spoke surprisingly hawkish. She indicated that the BOC is pondering the need of a rate hike as the economy is picking up. CAD/USD dropped from the 1.3470 area to the low 1.33 area and trades currently at 1.3285.
Today, the eco calendar is modestly interesting, with the German ZEW investors sentiment and the US NIFB small business confidence and the PPI’s. German ZEW economic sentiment is expected to improve further as the financial and economic conditions in Germany and EMU remain constructive. The impact on FX is mostly limited. US NFIB small business confidence is expected stable at a high level 104.5. US PPI is expected to slow down to 0.0% M/M and 2.3% Y/Y (from 2.5%). A weak figure might cause temporary nervousness but with the CPI data and the Fed policy decision scheduled tomorrow, a big (negative) reaction of the dollar is unlikely. US equity futures suggest that the equity correction is petering out. A less fragile risk sentiment might be slightly USD supportive. The hearing of Attorney General Jeff Session before the Senate is a wildcard. Investors will today mainly look forward to the FOMC meeting. On Friday and Monday, a cautious dollar comeback petered out as risk sentiment turned negative. Even so, the market looks reluctant to be overall USD short going into tomorrow’s Fed decision. If the risk-off correction eases, the dollar might strengthen modestly
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 and driving the pair further down in the 108.13/114.37 range. At the end of last week, the USD/JPY decline slowed, but 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 disappointing US payrolls, but no sustained followthrough gains occurred. The Trump top/correction top at 1.1300/1.1366 is next resistance. USD sentiment will have be very negative to clear this hurdle. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: Off the recent highs, but minor follow-through losses
EUR/GBP
Sterling sell-off to take a breather?
Sterling faced new selling pressure yesterday as political uncertainty after the Conservative election defeat remained high. EUR/GBP started a gradual, but protracted intraday uptrend and set a minor new 2017 top in the 0.8865 area. Cable dropped to the 1.2660 area. The sterling decline slowed during the US trading session as both GBP/EUR and cable met technical support, but there was no sign of any rebound yet. EUR/GBP closed the session at 0.8850. Cable finished the day at 1.2659.
UK price data will be published today. Headline inflation is expected stable at 2.7% Y/Y. Core inflation is expected to decline from 2.4% Y/Y to 2.3% Y/Y. We don’t expect the inflation data to be of major importance for sterling trading. The BoE will keep a cautious tone as political uncertainty dominates. If anything, weaker than expected data will have slightly more impact than above-consensus data. Politics will remain the main driver. The huge differences on the Brexit approach in the conservative party aren’t solved at all. Even so, after yesterday’s internal debate, we have the impression that a resignation of May isn’t imminent yet. This might temporary ease the pressure on sterling. However, the picture remains fragile.
From a technical point of view, EUR/GBP broke above the 0.8774 resistance and tested the 0.8854 area(2017 top) on Friday. A real break didn’t occur. A retest of that area is possible. 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: first test of 2017 top rejected, but sterling remains in the defensive
