Sunrise Market Commentary
- Rates: More of the same or surprise from Yellen?
Today’s wildcard is Fed chairwoman Yellen’s speech. Will she holds on to the FOMC’s communication line from the June statement, downplaying the recent setback in eco data, if she touches on monetary policy? We think so given the low amount of eco data published since. That should prevent more US Treasuries gains ahead of key eco data (PCE on Friday). - Currencies: Dollar ‘resilient’ despite disappointing US data
The dollar easily reversed an intraday setback after poor US durable orders. However, EUR/USD and USD/JPY are still locked in tight ranges. The focus for USD trading is on US consumer confidence and on a speech of Fed’s Yellen today. If Yellen confirms the Fed normalization path, it should protect the USD downside, but sustained USD gains need better data
The Sunrise Headlines
- US equities closed flat (S&P/Dow) to lower (NASDAQ). Asian markets follow WS and trade mixed. Brent oil tries to move further up, but little headway is made overnight.($/barrel).
- Brazilian president Temer is charged with corruption by the chief prosecutor. This unprecedented development may put the president on trial, if 2/3 of the chamber of deputies approve to proceed.
- The US Supreme Court cleared much of President Trump’s travel ban to take effect this week and agreed to hear arguments in the fall, giving the president at least partial vindication for his claims of closing the nation’s borders.
- Barnier, the EU chief negotiator, rejected May’s offer to protect work and residency rights for its citizens living in Britain and asks Britain go further.
- The US Senate’s health care bill would increase the number of uninsured Americans by 22 million by 2026, the Congressional Budget Office said. The report came as Republicans released a slightly revised version of the legislation.
- China’s industrial profits rose 16.7% in May from a year earlier as global demand improved, helping to fill companies’ order books.
- With little data on the eco-calendar, investors will focus on Yellen, Carney and the ECB’s forum for policy clues. We also have Italy, Germany and US selling bonds today and June US consumer and Richmond manufacturing confidence coming out.
Currencies: Dollar Still Awaiting A Trigger For A Directional Move
Will Yellen help the dollar?
On Monday, the dollar initially profited from positive risk sentiment. The US currency temporary reversed the intraday gains on disappointing US durable orders, but showed resilience afterwardst. Especially USD/JPY erased the post data weakness amid talk of new carry trades funded in yen. The pair closed the session at 111.86 (from 111.28). EUR/USD finished the day at 1.1182.
This morning, Asian equities trade narrowly mixed. USD/JPY trades in the high 111 area, but a test of the 112.13 resistance didn’t occur yet. EUR/USD hovers in the high 1.11 area. Yesterday’s comments from ECB’s Draghi defending the low rate policy maybe prevented further euro gains. Basically, the recent sideways trading persists. Commodity currencies like the CAD, the AUD and the kiwi dollar remain well bid. The latter continues its recent outperformance despite a smaller May trade surplus.
US Consumer confidence and Yellen in focus
In the US, consumer confidence (Conference board) and the Richmond Fed manufacturing index will be published. Consumer confidence is expected to ease slightly, but another negative surprise may add to lingering uncertainty on the Fed rate hike path. That should be USD negative. However, the dollar easily resisted a poor durable goods report yesterday. The market might be cautious to place big bets ahead of a speech of Fed’s Yellen in London (CET 19.00). If she addresses monetary policy, we expect her to confirm to Fed communication after the June FOMC decision. This might help to protect the downside of the dollar, but we don’t expect a big USD rebound. For that the happen, US data have to improve. Headlines from the ECB forum in Portugal are a wildcard. In a daily perspective, we expect EUR/USD trading to remain technical in nature ahead of Yellen. We also keep an eye at the USD/JPY price action. We are a bid surprised by recent ‘relative dollar strength’ even as core yields stay low. For now, we remain cautious on further USD/JPY-gains as long as US eco data remain mediocre and as long as the dollar receives no additional interest rate support
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 of late, but we remain cautious to forecast a U-turn.
EUR/USD: test of 1.1300/66 resistance rejected, but correction is modest. First support at 1.1110 holds
EUR/GBP
EUR/GBP locked near 0.88
Yesterday, the conservative party reached a deal with the DUP of Northern Ireland to support the minority government of PM May. The deal applies for the life of the current parliament (till 2022).Amongst others, it contains £1bln extra funding for northern Ireland. Sterling gained temporary a few ticks after the announcement, but the reaction was negligible. EUR/GBP closed the session at 0.8789. Cable finished the day at 1.2723.
Today, the CBI retail data will be published. A modest decline is expected. The CBI data are interesting but have rarely a lasting impact on GBP-trading. Even so, we look for the market reaction in case of better than expected data as the debate on a rate hike in the BoE intensifies. BoE governor Carney will give a press conference after the publication of the Financial stability report. This is not the forum for an in extenso debate on monetary policy, but the BoE governor can make some sidesteps. If anything, his assessment might be slightly negative for sterling. Headlines from the Brexit negotiations remain a wildcard. The EU apparently holds a rather tough stance which is a tentative sterling negative.
From a technical point of view, EUR/GBP extensively tested the 0.8854 area (2017 top), but a real break didn’t occur. The BoE debate on a rate hike 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
