Sunrise Market Commentary
- Rates: Market moving towards the Fed?
If the Fed holds on to the blueprint of its rate path and communicates about the start of the balance sheet run-off in H2 2017, it should confirm last week’s technical bottoming out on US yield markets (failed tests 5-y (1.69%), 10-yr (2.17%) and 30-yr (2.82%) and could start a new up-leg in yields. - Currencies: Can Fed put a floor for the dollar?
Today’s Fed decision might decide how the recent USD stalemate will be broken. The market is positioned for a soft Fedmessage. If the Fed sticks to its normalization approach, there might be room for a USD rebound. The sterling self-off eased yesterday after higher UK inflation data. Some further GBP rebound is possible, but we don’t expect the move to go far.
The Sunrise Headlines
- Asian equities were mixed this morning, with solid gains in Australia and New Zealand offset by China, where markets weakened despite data showing resilience in retail sales (+10.7%) and industrial output (+6.5%).
- The dollar holds on to its two-day decline as traders seek clarity on US Fed’s policy plans for further tightening and for balance sheet unwinding after today. Markets expectations on a rate hike today are at 97%
- WTI oil price fell to trade near $46 after the American Petroleum Institute said U.S. oil stockpiles increased last week.
- UK PM Theresa May is under growing pressure to abandon the hard Brexit as she tries to get a deal with the Northern Ireland’s DUP. Time pressure is rising as negotiations with the EU are due to begin next Monday.
- Schaeuble and Macron yesterday both stated a reversal of Brexit is possible during entire negotiating period.
- Attorney general Sessions testified to lawmakers that he had not colluded with Russia during the ‘2016 presidential campaign. He also refused to elaborate on conversations with Trump concerning this issue and the Comey-firing.
- The main event on the eco-calendar today is the Fed’s policy meeting. For the US, the CPI and retail sales are major releases,… but the timing ahead of the FOMC may dampen reactions.
Currencies: Can Fed Put A Floor For The Dollar?
Dollar discounting too much Fed softness?
Yesterday, USD/JPY gained only a few ticks as global equities recovered from the tech correction and as core bond yields rose a few basis points. EUR/USD held a tight range close to and mostly just north of 1.12 as there was little news to give direction and as investors awaited the Fed . EUR/USD finished the day at 1.1211. USD/JPY closed at 110.07.
Overnight, Asian indices are trading mixed despite yesterday’s WS rebound. China underperforms, despite Chinese close to expectations. Oil struggles not to fall back to the recent lows (Brent at $48.30). USD/JPY is holding a tight range near 110. EUR/USD is going nowhere in the 1.12 area. Bank of Canada Governor Poloz said that the rate cuts have done their job, reinforcing the short squeeze of the CAD. USD/CAD dropped to the low 1.32 area.
Today, the US eco calendar is well filled. CPI Inflation (0.0% M/M and 2.0% Y/Y) and retail sales (0.1% M/M headline) are expected modestly. A negative surprise, especially in inflation, may cause some nervousness going into the FOMC decision and be a slightly USD negative intra-day. However, investors are unlikely to start a strong directional move just hours before the FOMC decision. The Fed will raise its policy rate by 25 bps. Markets will scrutinize the Fed rate cycle outlook (new dots), the Fed plans to reduce the balance sheet and the press conference of Fed’s Yellen. (see fixed income part). A softening in the Fed stance is not excluded, but the median dot seem robust for 2017/18 and some risks exists for a slightly lower 2019 median. Markets might see the dots moving in the direction of the markets as a potential repeat of the 2015/16 scenario. Even so, our basic hypothesis is that both interest rate markets and the dollar discounted already enough Fed softness. We don’t expect a sharp comeback of the dollar, but the Fed has to be surprisingly soft to trigger sustained USD losses . We maintain the working hypothesis that a break of EUR/USD above Trump highs (1.1300/66) remains difficult. Such a scenario might also be slightly supportive for USD/JPY. However, the yen was well bid of late. The reaction of equities is a wild card (will the Fed give some kind of soft warning on equity valuations?). Markets might also be cautious ahead of Friday’s BOJ decision. We remain cautious on the USD/JPY upside
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. Early 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 reached a short-term correction top at 1.1268. There was a minor break after 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 be very negative to clear this hurdle. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: Will topside be better protected after Fed decision?
EUR/GBP
Sterling sell-off slows, at least temporary
Sterling selling eased yesterday. Political uncertainty remains high, but the battle for Theresa May’s political survival became less aggressive than it was over the previous days. Sterling started a bottoming-out process. Mid-morning, UK inflation (May) rose more than expected, from 2.7% to 2.9%. UK bond yields rose and sterling slightly regained ground. EUR/GBP dropped below 0.88 and closed the session at 0.8790. Cable rebounded to the mid 1.27 area.
UK labour market data will be published today. They will be overshadowed by political developments. Wage date might still have some impact on sterling. Especially soft AHE might convince markets that it will be very difficult for the BoE to raise rates anytime soon. On the political scene, May still tries to find support for a minority government. She also faces a growing number of calls for a soft Brexit, showing internal problems within her own conservative party. The political Gordian knot isn’t solved yet. Yesterday, we indicated that the pressure on sterling might temporary ease, but the picture remains fragile.
From a technical point of view, EUR/GBP broke above 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 opens 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
