Sunrise Market Commentary
- Rates: Draghi steps up to the plate
Markets will further digest ECB president Draghi’s comments. Can “deflationary replaced by reflationary forces” become the new “whatever it takes”? We recommend a sell-on-upticks strategy in the Bund. On EMU bond markets, it could mark an end to the long-term narrowing trend. - Currencies: EUR/USD and EUR/GBP testing key resistance levels
A combination of hawkish comments from ECB’s Draghi and negative (political) headlines from the US propelled EUR/USD for an extensive test of the 1.1300/66 resistance. A break would be significant from a technical point of view. Euro sentiment is strong, but an equity correction remains a wildcard for global FX trading. EUR/GBP is also testing the 2017 top
The Sunrise Headlines
- Wall Street was knocked hard in the wake of a delay to a US healthcare reform vote in Senate, the IMF’s US growth forecast downgrade, a tech sell-off (Nasdaq -1.5%) and Fed Yellen’s warning of “somewhat rich” asset valuations. Asian stock markets manage to limit losses overnight.
- Energy stocks rose as the broadly weaker tone of the dollar helped oil prices extend their recent rally from multi-month lows. Gold also benefited from a weaker dollar overnight, though still not recovered from the fat-finger sell off.
- The Chinese yuan surged for a second day amid speculation of central bank intervention. Meanwhile the euro rose on ECB Draghi’s more hawkish tone with EUR/USD now around 1.135 and EUR/JPY just above 127. ECB’s Constancio confirmed in an interview that Draghi’s speech was in line with policy.
- A new cyberattack similar to WannaCry has reached Asia after spreading from Europe to the US overnight, hitting businesses, port operators and government systems.
- In a CNBC interview, Bank of Canada’s Poloz said rate cuts have done their job and stated that excess capacity seems close to being used up. This shows that the BoC is coming closer to changing its monetary policy towards hiking.
- A trio of Fed officials, including Chair Yellen, pointed (although very cautiously) to the potential overvaluation of assets. This could mean that financial stability is gaining some interest in the monetary policy decision mix.
- The eco calendar is thin with only US pending home sales, EMU M3 money supply and a US 7-yr Note auction. Today is also the final day of the ECB forum in Sintra.
Currencies: EUR/USD And EUR/GBP Testing Key Resistance Levels
Draghi propels euro. Yellen fails to help the dollar
The stalemate in USD trading ended yesterday, as ECB’s Draghi said the economic improvement could lead to a gradual ECB policy change. The euro jumped higher. Later on, the dollar was sold as the IMF downgraded its US growth forecast and the vote on the US health care bill was delayed. EUR/USD jumped north of 1.13. Fed’s Yellen repeated her intention to continue a gradual rate hike path, but it couldn’t help the dollar, at least not against the euro. EUR/USD closed the day at 1.1339. USD/JPY behaved differently. The rise in core yields and sharp gains in EUR/JPY pushed USD/JPY beyond the 112.13 resistance even as US equities came under pressure. The pair closed the session at 112.35.
This morning, Asian equities trade with modest losses as the sell-off in the tech sector in the US continues to weigh. At the same time, yields remain under upward pressure, while oil struggles to continue its recent rebound. EUR/USD is holding near the rally highs, currently trading in the 1.1347 area. USD/JPY tries to sustain north of 112, but the momentum eases as correction of tech equities tends to support the yen.
Today, the eco calendar is again thin. There are only second tier eco data in Europe, while in the US, the trade balance and inventory data won’t affect USD trading. Investors will ponder the impact of yesterday’s comments/events and will also keep a close eye at the final day of the ECB forum in Sintra, with comments from ECB’s Draghi, BOJ’s Kuroda and former Fed president Bernanke. It’s is too early to firmly conclude that the global policy normalisation has started, but tentative signs of such process are multiplying. Even so, investors focus primarily on adapting positions to the ECB change of tone. The euro should remain well supported short-term. Will EUR/USD be able to take out the 1.1366 resistance? The FX reaction to a further equity correction is a less straightforward. For now, USD/JPY and EUR/JPY are supported by higher core yields, but this pattern probably won’t continue in case of a more protracted equity correction. In this context we stay cautious on further USD/JPY gains, despite the recent good performance. The euro is currently favoured over the dollar. Short-term there is no reason to row against the euro positive tide. However, we are not convinced on the safe haven characteristics of the euro in case of a protracted global risk-off correction. We continue to keep a close eye at EUR/JPY. A reversal in this cross rate at some point might also cap the topside of EUR/USD.
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 to a test of the 1.1300 area going into the FOMC decision, but the test was rejected. Yesterday, a combination of hawkish ECB comments and negative US headlines pushed EUR/USD for an intensive test of the 1.1300/66 resistance are. The test is ongoing. A sustained break would be significant from a technical point of view and could open the way to the 1.1616/1.1714 LT correction tops A return below 1.12 (STMA) would be a first indication that the euro rally is easing. A drop below 1.1119 would call off the downward alert.
The USD/JPY rally ran into resistance in early May and the pair returned lower in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair beyond a first minor resistance at 110.81. The pair yesterday regained the 112.13 correction top, but the test is ongoing . A break would improve the ST-picture. Even so, were remain cautious on further USD/JPY gains as equity volatility tends to rise
EUR/USD: 1.1300/66 resistance under heavy strain on Draghi comments and negative US headlines
EUR/GBP
EUR/GBP retests 2017 top
Yesterday, the Draghi comments sent EUR/GBP-well north of 0.88, but there were also modest positive spill-over effects on cable. In the financial stability report, the BOE warned on easing credit standards for consumer credit. The bank increased the cyclical capital buffer from June 2018. The measures is a kind of monetary tightening and might make a rate hike (slightly) less probable. Especially EUR/GBP remained well bid after the financial stability report and closed the session at 0.8863. Cable profited from a soft dollar and closed the day at 1.2814.
This morning, the only release of the day, Nationwide UK House prices rose more than expected, but without market impact. So, sterling trading will be driven by global factors (euro strength) and by political/Brexit headlines. The news flow on UK politics remains diffuse, at best and the euro is in good shape. So, there is no reason to row against the EUR/GBP uptrend. A negative risk sentiment, if it would continue, is also more negative for sterling than for the euro.
From a technical point of view, EUR/GBP is again testing the 0.8854/66 area (2017 top). The BoE debate on a rate hike caused some volatility recently, but wasn’t able to support sustained sterling gains against the euro. A break of the 2017 top 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: testing key resistance at 0.8854/66
