Sunrise Market Commentary
- Rates: Bund cannot move away from major support
Today’s calendar is rather unattractive with the exception of the FOMC Minutes, to be published after the European close. US traders rejoin the trading. Geopolitical tension surrounding N-Korea affected early Asian trading, but the effects again seem to fade going into the European session. We expect sentiment-driven technically-orientated (sideway) trading. - Currencies: USD continues cautious comeback ahead of US data
Yesterday, the dollar continued trading with a cautious positive bias. Today’s eco data are no market movers. The Fed Minutes might be slightly USD supportive. However, sustained dollar gains need convincing US data and they won’t be released today.
The Sunrise Headlines
- Stocks in Asia endured a choppy session without any lead in from Wall Street. Initial losses on political tension were reversed later in the trading session.
- An emergency UN Security Council will try to formulate a response to N-Korea’s test of an intercontinental ballistic missile that could hit the US mainland. In response to the test, the US and S-Korea held a joint military drill.
- Moody’s cut Qatar’s credit outlook to negative on concern there won’t be a quick resolution to the spat with its Arab neighbours. Qatar did keep its long-term issuer rating of Aa3.
- The Caixan Chinese services PMI, that focusses on smaller and private firms, showed the pace of growth slipping in June (from 52.8 in May to 51.6) while the official PMI (mostly state-owned firms) rose to its highest level in Q2.
- Official government sources have stated that Russia would oppose deeper OPEC cuts and that it wants to stick to the current deal. Further reductions would suggest the cartel is nervous the pact isn’t supporting prices enough.
- Europe’s almost 1 trillion euros in non-performing loans is one of the greatest challenges facing the bloc and requires a coordinated response, ECB Vice President Constancio wrote, who announced that the ABS part of the APP should be reviewed.
- The most interesting items on the eco-calendar are the FOMC meeting minutes. In Europe and the UK, the services PMI will be released (final readings in Europe) and Germany will try to sell €4B worth of bonds
Currencies: USD Continues Cautious Comeback Ahead Of US Data
Fed Minutes to support gradual USD rebound?
Yesterday morning, it appeared like a risk-off sentiment would hamper Monday’s USD rebound. However, European markets ignored the Asian tensions. In a market deprived of important eco news, the dollar found its composure and continued an, albeit very modest, rebound. EUR/USD closed the session at 1.1346 (from 1.1346). USD/JPY finished the day at 113.28 (from 113.38).
This morning, Asian equity markets took again a hesitant start as geopolitical tensions on North Korean continued to dominate. However, market sentiment improved throughout the session. USD/JPY dropped temporary to the 112.83 area, but is again trading north of 113. In technical trade, EUR/USD is marginally stronger at 1.1355.
The eco calendar is fairly thin with the US factory orders, the final June EMU services PMI’s and May EMU retail sales. The former is no market mover as the durable orders, the most cyclical part of the factory orders, have already been published. Similarly, the final EMU service PMI is rarely revised substantially. Retail sales are very volatile. The FOMC Minutes are more interesting. The Fed unveiled after the June meeting details on the tapering of its balance sheet, but not the starting date. Some governors suggested it could start soon. As Yellen may leave the Fed early 2018, she will probably put this tapering in motion. A start in September is possible. The third FED rate hike for 2017 (dots) may then be postponed to December. With the Fed diverging from its double mandate of full employment and 2% inflation in opposite sense, we hope to read in the Minutes what is their biggest concern: too low inflation or too tight labour market?
Yesterday and on Monday, the dollar made a gradual comeback as investors anticipated good US data this week. However, today’s data are no market movers. Technical trading might prevail. The Fed Minutes might be slightly USD supportive (continuation of the normalisation). A scenario of the Fed reducing its balance sheet soon, combined with a possible delay of the next rate hike is probably more supportive for USD/JPY than for USD/EUR. USD/JPY is potentially more sensitive to a rise in LT US yields than USD/EUR. Aside from the Fed minutes, the dollar needs strong data. We won’t get this kind of strong/important data today. Geopolitical tensions in Asia remain a wildcard for USD (USD/JPY) trading.
Technical picture: USD looking for a bottom
A combination of hawkish ECB comments and weaker US eco data pushed EUR/USD last week above the 1.1300/66 resistance area with a new high at 1.1448. The next resistance is now the 1.15 area. Further out LT-correction tops are coming in at 1.1616/1.1714. A break would end the long consolidation period that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area will be difficult to break for now. A Return below the 1.13 area would be first indication of a loss of upside momentum. 1.1119 is the next important support.
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 the 112.13 correction top early last week, but follow-through gains were modest. So, the jury is still out. A sustained break would improve the ST-picture. Were remain cautious on further USD/JPY gains LT.
EUR/USD correcting off last week’s top, but no clear technical signal yet
EUR/GBP
EUR/GBP: consolidation persists
Yesterday, cable and EUR/USD drifted south in lockstep, mirroring a cautious intraday USD rise. The UK construction PMI dropped slightly more than expected from 56.00 to 54.8, without lasting impact on sterling. BoE’s McCafferty in an interview reiterated that a rate hike would be prudent. His view is no surprise as he already voted for a rate hike in June. The impact on sterling trading today was again limited, but it did illustrate the internal debate within the Bank of England. EUR/GBP closed the session unchanged at 0.8781. Cable finished the day at 1.2920 area.
Today, the UK services PMI is expected to decline from 53.8 to 53.5. After the publication of the manufacturing and the construction PMI’s, we see slight downside risks compared to the consensus. A weaker than expected figure could suggest that the debate on a rate hike within the BoE isn’t finished yet, despite recent comments from BoE’s Carney. This could be a mildly negative for sterling, but probably won’t change the broader picture. Short-term, we see EUR/GBP staying below the resistance of 0.8866/80 as markets are still digesting the recent decline of sterling/rise of EUR/GBP.
From a technical point of view, EUR/GBP set a minor top north of the 0.8854/66 resistance (2017 top). A sustained break didn’t occur, causing a correction on the recent EUR/GBP rebound. A return below the 0.8655 correction low would indicate easing pressure on sterling but such a break lower will be difficult. A EUR/GBP buy-on-dips approach remains favoured
EUR/GBP topside test rejected. A modest/temporary sterling comeback might be on the cards
