Sunrise Market Commentary
- Rates: Core bonds remain resilient, partly because of oil sell-off
Risk sentiment and oil prices could guide global trading. Core bonds can profit in a daily perspective if oil extends losses, but moves are expected to remain within narrow technical ranges. The technical picture for Brent deteriorated following the break below $46/barrel. The eco calendar only contains second tier eco data. - Currencies: Oil price and low core yields weigh on dollar
There is little eco news to guide USD trading this week and this won’t change today. The decline of the oil prices keeps LT yields low and weighs slightly on the dollar. Sterling rebounded temporary on hawkish comments from BoE Haldane, but a test of the EUR/GBP 0.8854/66 resistance is still possible.
The Sunrise Headlines
- The S&P and Dow Jones performed weak yesterday, amongst others due to falling oil prices. Nasdaq was a clear outperformer, gaining 0.74%. In Asian markets, equity gains are modest overall.
- Brent oil is holding under $45/ barrel after yet another decline during US trading hours yesterday.
- The New Zealand Reserve Bank kept its interest rates unchanged at 1.75%. Markets interpret the NZRB statement slightly less dovish. This resulted in small gains for the Kiwi dollar versus the US dollar.
- Fed policymaker Harker said he prefers pausing rates while reducing the bank’s balance sheet. He also stated that, despite low wage growth, there is very little slack left in the jobs market and wage acceleration will soon start.
- Senate Republicans plan to release a new health-care bill that would curtail federal Medicaid funding, repeal taxes on the wealthy and eliminate funding for Planned Parenthood as part of an effort to undo Obamacare.
- PM May will outline her approach to reassuring EU expatriates about their futures in the UK. The UK stance will likely disappoint EU-members as May faces a tough balancing act between the EU-wishes and the euro-sceptics at home.
- The eco-calendar contains mainly second tier releases like US jobless claims, UK CBI total orders, the Norvegian rate decision and EMU consumer confidence. In terms of events, the EU summit and Fed speaker Powell might be interesting
Currencies: Oil Price And Low Core Yields Weigh On Dollar
Oil price decline weighs on USD
Yesterday, there was nothing to inspire USD trading. EUR/USD was locked in the mid 1.11 area for most of the day. An uptick in core bond yields supported a temporary USD/JPY comeback, but the USD gain could not be sustained. USD/JPY finished the session at 111.38 (from 111.45). EUR/USD closed an uneventful session at 1.1168 (from 1.1134).
Overnight, risk sentiment in Asia remains constructive. The tech sector rebound outweighs the impact of a decline of the oil price. Brent oil is holding below the $45/barrel level. USD/JPY trades with a slightly negative bias. The dollar also trades marginally softer against the euro (EUR/USD 1.1170 area). The Reserve bank of New Zealand, as expected, left its policy rate unchanged at 1.75%. The RBNZ maintained a positive economic outlook. It also wasn’t worried about the recent rise of the kiwi dollar. NZD/USD strengthened to currently trade in the 0.7250 area.
The eco calendar is again only little interesting. In EMU, consumer confidence is expected to improve slightly further. In the US, the jobless claims and some second tier data will be published. The data might have some intraday significance for the dollar at best, but won’t set a clear directional trend. The decline in oil prices and the equity performance remain wildcards. The usual inverse correlation between the dollar and oil currently doesn’t work. Sometimes this turns out to be USD negative as well. USD/JPY is currently more sensitive to the low level of core interest rates rather than to the swings in the equities. In this context, a further decline of oil might continue to weigh on USD/JPY. The impact on EUR/USD is less obvious. We maintain a neutral stance on EUR/USD today.
Global context. After last week’s relatively hawkish Fed statement, the topside in EUR/USD is better protected and a cautious sell-on upticks approach is advised. However, sustained USD gains need better US eco data, supportive Fed comments and/or higher US yields. With few high profile US data this week, it is doubtful that the US currency will receive this support. If the equity rally slows, so might be the USD rebound. Oil is also a wildcard
Technical picture
The USD/JPY rally ran into resistance in early May. A mini sell-off mid-May made the short-term picture negative, driving the pair further down in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair beyond a first minor resistance at 110.81. A break beyond the 112.13 correction top would improve the ST-picture. The day-to-day sentiment improved slightly of late, but we remain cautious to forecast a U-turn.
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 tested the 1.1300 area going into the FOMC decision, but the test was rejected. So the Trump top/correction top at 1.1300/1.1366 proved to be a solid resistance. USD sentiment will have to become really negative to clear this hurdle. EUR/USD 1.1110 is a first minor support. A return below 1.1023 would indicate that the upside momentum has eased
EUR/USD: test off 1.1300/66 resistance rejected, but correction remains modest. First support at 1.1110 holds
EUR/GBP
Sterling haunted by BoE comments
Comments from BoE governors continue to haunt UK interest rate markets and sterling. On Tuesday sterling was hammered as BoE governor Carney said that it is too early for a rate hike. EUR/GBP yesterday even came within reach of the 0.8854/66 key resistance. However, sterling fortunes changed again as BoE chief economist Haldane said that it could be prudent to withdraw some policy stimulation in the second half of the year. At last week’s BoE meeting, Haldane was the in the camp of the MPC members who voted to leave rates unchanged. So, the division within the BoE is profound. The outcome of the next BoE meetings might be a close call. Sterling jumped sharply higher on the Haldane comments but returned part of the gains later. EUR/GBP closed the session at 0.8814. Cable finished the day at 1.2671.
Today, the CBI Trends orders will be published. A modest decline (7 from 9) is expected. It is interesting to see whether the recent turmoil might affect the economy going forward. However, the CBI data are usually no market mover. The political developments remain a wildcard. The interest debate with the BoE could in theory support sterling. However, at the end of the day, we still see no rate hike short-term as political and economic uncertainty remains really high. We maintain a sterling negative bias.
From a technical point of view, EUR/GBP extensively tested the 0.8854 area (2017 top), but a real break didn’t occur. BoE comments caused some intraday volatility recently. In the end, the 0.8854/66 resistance remains within reach. A break would open the way to the 0.90 area. A return below the 0.8655 correction low would indicate easing pressure on sterling. Such a break lower will be difficult. A EUR/GBP buy-on-dips approach remains favoured
EUR/GBP: sterling rebounds temporary on BoE comments but the 0.8854/66 resistance stays within reach
