Sunrise Market Commentary
- Rates: Core bonds still in wait-and-see modus
Well-filled calendar with US eco data, EMU countries’ auctions and some central bank talks. We expect the important US eco-data to be mixed, which might keep the deadlock in core bonds intact ahead of the US payrolls. Key Bund support looms dangerously and the Bund look heavy, unable to take distance from it in past days. - Currencies: USD rebound slows ahead of key US data
Yesterday, the USD rebound slowed. Today, the focus is on the ADP report and on the US non-manufacturing ISM. We doubt that today’s data will give a strong enough signal to support further USD gains. A strong payrolls report is probably needed to push EUR/USD below the 1.13 support
The Sunrise Headlines
- WS struggled to establish a clear direction as a tech rebound was offset by weakness in the energy sector. The market reaction to the Fed minutes was limited. Asian markets are trading mixed to slightly lower.
- The minutes of the June rate-setting meeting showed the US Fed divided over the exact timing of the balance-sheet wind down, September or December, but the general tone was hawkish despite a spate of weak inflation readings.
- Brent oil has stabilised around 48.20$/barrel after a significant drop yesterday that ended the longest winning streak this year.
- In the UN Security Council, the US cautioned it was ready to use force if needed to stop North Korea’s nuclear missile program but said it preferred global diplomatic action. With or without Russia and China.
- Headline total US factory orders fell 0.8% in May (consensus -0.5% and -0.3% in April), but core orders and shipment activity gained modestly. The durable goods orders were bang on consensus at -0.8% (after -1.1% in April)
- German factory orders in May (1.0% M/M, and 3.7% Y/Y) were lower than consensus (1.9% M/M and 4.5% Y/Y) but higher than in April (-2.2% M/M and 3.3% Y/Y). Orders were driven by export demand for investment goods while orders for basic and consumer goods declined.
- The meeting of four Arab states to discuss the negative Qatari response to their demand list ended without further sanctions. The current boycott, that started after Qatar was accused of terrorism and allying with Iran, continues.
- The eco-calendar contains mostly US data with the ADP employment change, initial jobless claims and the ISM non-manufacturing. Also, ECB’s Praet will speak in Paris and the ECB policy meeting details will be released.
Currencies: USD Rebound Slows Ahead Of Key US Data
US rebound slows ahead of key US data
Yesterday, the dollar initially extended the gradual rebound of the previous days, but the move did run into resistance later in the session. Strong EMU PMI’s failed to support the euro. The Fed Minutes showed different views on the nature of the recent slowdown in inflation and on the timing to start the reduction of the balance sheet. There was some volatility in US bonds and in the dollar after the release of the report, but the broader picture didn’t change. EUR/USD closed the session at 1.1352. USD/JPY finished the day at 113.26.
This morning, most Asian equity indices are trading with modest losses (on average about 0.5%). Signs of division within the Fed, yesterday’s setback of the oil prices and ongoing geopolitical uncertainty on North-Korea is causing some investors caution. USD/JPY drifted back to the 113 area. EUR/USD is also ceding a few ticks and trades at around 1.1340. The trade-weighted dollar is slightly off yesterday’s intraday correction top (96.25 from 96.51).
Today, the market focus will again be on the US data. The June ADP employment report & Challenger lay-offs and the weekly jobless claims precede tomorrow’s key US payrolls. There is no one-on-one link between these data and the payrolls, but they could affect the markets’ prepositioning. ADP private job growth is expected at 185,000. The last three months net payrolls gains amounted to 50K, 174K and 138K, well below the 255K, 173K and 253K of the ADP. We suspect that the payrolls underestimated the trend while ADP exaggerated job growth. Therefore, we see downside risks to the ADP report (190K expected), but upside risks to the payrolls (177K expected). Markets will probably handle a downward surprise in the ADP with caution. The June non-manufacturing ISM is expected to have eased slightly from 56.9 in May to a decent 56.5. Following an upward surprise in the manufacturing ISM, we put risks for the non-manufacturing one also on the upside.
Earlier this week, the dollar rebounded as investors anticipated good US data this week, but the rebound did run into resistance yesterday. The ‘division’ that was apparent in yesterday’s Fed minutes might cause some further investor caution on the dollar. The US currency probably needs really convincing data. We expect today’s US data to be good, but markets/the dollar probably need confirmation from a strong payrolls report to extend any meaningful comeback So, some consolidation on the recent USD rebound might be in the cards today. Geopolitical tensions in Asia remain a wildcard for USD trading going into tomorrow’s G20. This morning’s equity performance in Asia also doesn’t give a clear guidance for USD 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 last week, but follow-through gains remain modest. So, the jury is still out. A sustained break would improve the ST-picture. We remain cautious on further USD/JPY gains LT.
EUR/USD correcting off last week’s top, but no clear technical signal yet. 1.13 support holds, for now
EUR/GBP
Sterling trading still waiting for a new driver
Yesterday, the UK services PMI eased slightly more than expected from 53.8 to 53.4 (53.5), but the deviation from consensus was too small to really affect sterling trading. EUR/GBP and cable trading was technical in nature or driven by the broader trends in the euro and the dollar. The gradual USD rebound pushed cable to the low 1.29 area, but the pair regained ground slightly as the dollar rally eased later on. Cable closed the session at 1.2934. BoE Saunders warned households should prepare for interest rates to go higher. However, his assessment brought little news for markets as he already voted for a rate hike last month. EUR/GBP finished the day at 0.8777.
Today, there are no important eco data in the UK and we are also not aware of any BoE speeches. The Brexit negotiations also moved a bit to the background as a driver for sterling trading. So, technical trading might prevail. Over the previous days, sentiment on sterling wasn’t too bad. 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). The recent technical decline of EUR/GBP might still go a bit further.
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 continue
