Sunrise Market Commentary
- Rates: Slow start ahead of key events, but Italian underperformance?
We start the week with a neutral bias as markets will focus on Yellen’s speech (tomorrow) and German/US inflation readings (both on Friday). Italian BTP’s could underperform following the Italian state’s rescue of 2 regional lenders and as the center-right’s gains in municipal elections could further tangle up the political landscape. - Currencies: Dollar still awaiting a trigger for a directional move
Last week, there was no clear guide for USD trading, leaving EUIR/USD and USD/JPY in tight ranges. This process might still continue at the start of this week. US data surprise or clear CB guidance is probably needed to unlocked this stalemate. Sterling feels conflicting influences from lingering political uncertainty, but hawkish BoE talk.
The Sunrise Headlines
- US stock markets ended flat (Dow Jones) to 0.5% higher (Nasdaq) in the final session of an uneventful week. Overnight, Asian stock markets record similar gains with China outperforming (up to +1%).
- Italian authorities said they were prepared to spend as much as €17B as part of the shutdown of two regional banks, in a deal that will transfer the lenders’ best assets to Intesa for a nominal sum.
- Italy’s centre-right opposition was poised for an emphatic victory in municipal races around the country, bolstering its hopes of a political resurgence and dealing a blow to Matteo Renzi’s ruling centre-left Democratic party
- Fitch affirmed Belgium’s AA- rating (stable outlook) saying that the high debt ratio balances against the substantial net creditor position, strong governance indicators, high income per capita and macroeconomic stability.
- The Bank for International Settlements warned in its annual report that rising protectionist sentiment and a retreat from global cooperation on economic matters would threaten the world economy.
- US President Trump made calls to fellow Republicans in the US Senate to mobilize support for their party’s healthcare overhaul while acknowledging the legislation is on a "very, very narrow path" to passage.
- Today’s eco calendar contains the German Ifo-indicator and US durable goods orders. The US Treasury holds a $26B 2-yr Note auction
Currencies: Dollar Still Awaiting A Trigger For A Directional Move
Dollar still waiting for a directional trigger
Dollar cross rates didn’t show much spirit on Friday. USD/JPY kept a tight range near 111.30. EUR/USD moved slightly higher, from around 1.1150 to 1.1180. The short term (2y) interest rate differential between US/German narrowed from 200 bps on Monday to 196 bps on Friday. Reuters sources indicated that scarcity of German government bonds is a key ECB consideration for deciding on extending QE. It limits the possibility of a major extension. The rumours maybe underpinned the single currency, but it is a long shot.
This morning, Asian equities trade with moderate gains, as the Tech rally continues. A gradual rebound of the oil price is also slightly supportive. However, the direct impact of equities on USD trading is again small. USD/JPY opened soft, but reversed the initial dip and trades again in the 111.30 area. EUR/USD is trading little changed in the 1.1190 area.
Eco calendar heats up, Fed speakers take the stage
The June German IFO business sentiment is expected little changed. The weakening of the services PMI suggests some downside risks, even if the composition of both measures of sentiment is different. The US durable orders are expected to have dropped by 0.6% in May, following a drop in April. It follows strong readings in February/March. The more important orders excluding transportations are expected to have rebounded 0.4% M/M. The ECB holds its forum in Sintra on investment and growth. The subject contains lots of interesting items that touch monetary policy, but policy itself is not the subject. We expect few comments with direct on impact markets, but one never knows with such conference.
In a day-to day perspective, the data (Ifo and US durables) at the margin might be USD supportive, but it is highly unlikely that they will change the broader picture. Late in the session, the headlines from the ECB forum will filter trough. If there would be suggestions on policy normalisation on a more global scale, it could be slightly more supportive for the euro and the yen rather than for the dollar. However, all these considerations are highly hypothetical. So, we start the week with a neutral bias for EUR/USD trading. The positive risk sentiment might protect the downside of USD/JPY, but it didn’t cause any meaningful gains of late.
Technical picture: USD still confined to tight ranges
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. 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.
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.
EUR/USD: test off 1.1300/66 resistance rejected, but correction remains modest. First support at 1.1110 holds
EUR/GBP
Sterling balanced by BoE speak and political uncertainty
On Friday, sterling initially profited from the hawkish farewell speech of resigning BoE Forbes. The recent sequence of events (BoE meeting – Carney comments – Haldane speech) triggered a significant rethinking in rate hike expectations. The probability of a 25 bps hike by the BoE this year rose from 6.5% on June 14 to 50% Friday. However, sterling gains remained modest as official Brexit-talks started on a bad note. EU Tusk said that PM May’s opening offer on EU nationals living in the UK is below expectations. Sterling’s fortunes changed throughout the day with EUR/GBP reversing the earlier decline to close the session in again in the 0.88 area.
Today, the eco calendar only contains the BBA loans for home purchases. The focus for sterling trading will be on Brexit negotiations and on PM May trying to find support for her minority government. The results of the exchange of views on the rights of EU citizens in the UK didn’t go really smooth. On the other hand, the debate within the BoE might give sterling some downside protection, especially when UK eco data remain relatively strong. So, for now we expect EUR/GBP to hold its sideways consolidation pattern in the 0.88 area.
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 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.
