Sunrise Market Commentary
- Rates: US political scene interrupts core bond sell-off
Some risk aversion related to the leaked Trump Jr. emails could remain dominant in the run-up to Yellen’s testimony in front of US Congress (positive core bonds). We expect her to hold the Fed’s line (start run-off BS soon and 1 more hike in 2017) which shouldn’t cause strong market moves. - Currencies: Dollar sold as political noise weighs
The dollar remained in wait-and-see modus after the payrolls. It looked that this pattern would continue going into Yellen’s semi-annual testimony. However, a new flaring up of political noise trigger USD selling. The dollar probably needs outright positive news to make a U-turn. Will Yellen’s message be strong enough to deliver so?
The Sunrise Headlines
- US stock markets lost around 0.5% after the Trump Jr. emails, but managed to overcome those losses to close nearly unchanged. Overnight, Asian stock markets trade mixed with Japan underperforming (-0.5%).
- The US president’s eldest son attended a meeting last year to discuss allegedly incriminating information about Hillary Clinton they were told was being offered by the Russian government in support of Trump’s candidacy.
- Fed Governor Brainard embraced the plan to reduce the balance sheet "soon," but suggested her support for any future rate increases will depend in part on how inflation shapes up.
- EU finance ministers called for speedier unloading of bad debt by EU banks and recommended more money be put aside by the banks to protect them from trouble.
- Emerging Europe is facing increasing economic stresses that threaten to unwind some of the political progress made over the of past decades, top IMF official Thomsen said.
- The US Senate will delay the start of its August recess to give lawmakers more time to plough through a backlog of pending nominations and proposed legislation, including healthcare reform.
- Attention turns to Yellen’s testimony to US congress. Fed George and ECB Visco are also on the wires. The eco calendar is thin with EMU industrial production and the Fed’s beige book. The US, Germany and Portugal tap the market.
Currencies: Dollar Sold As Political Noise Weighs
USD declines further on ‘political noise’
The payrolls left markets with a mixed feeling on Friday. Employment growth was strong, but wages disappointed again. It didn’t help the dollar. EUR/USD hovered within reach of the recent highs. The recent rise in core (US/EMU) yields kept USD/JPY better supported. It looked that this pattern could continue till Yellen’s testimony before Congress today. However, soft comments from Fed’s Brainard and the release of new emails on contacts of Donald Trump Jr with Russia spoiled the game. The dollar was hit quite hard on this flaring up of political uncertainty. EUR/USD closed the session at 1.1467. USD/JPY reversed part of its recent gain even as the congruent correction on the US equity markets was limited and short-lived. USD/JPY closed the day at 113.94.
This morning, Asian equities are trading mixed to slightly softer in the wake of yesterday’s US political developments. The dollar remains in the defensive. USD/JPY is declining further in the 113 big figure (currently at around 113.45) even as the BOJ raised bond purchases in the 3-5-year sector to prevent a further rise in Japanese yields. EUR/USD trades with a positive bias, setting a new correction top in the 1.1489 area. Asian investors are looking forward to the Testimony of Fed’s Yellen before Congress. The trade-weighted USD (95.55 area) is nearing the recent lows.
Today, EMU data (May production) will have no big impact. Early this morning, markets will look out whether there is any further fall-out from the Trump-Russia commotion on global (equity) markets. The damage should be limited, but the weaker dollar might weigh on European equities. The focus will be on Yellen’s Testimony before Congress. The written testimony will be published at 14.30 CET. The Q&A will start after 16.00 CET. We expect Yellen to keep a balanced approach. She will probably confirm the start of a gradual reduction of the Fed ‘s balance sheet in the near term. She might be a bit less outspoken on the timing of additional rate hikes. She will probably confirm the Fed’s intentions on policy normalisation, but reiterate that the Fed remains data-dependent.
Dollar sentiment remained fragile after the payrolls. Yesterday’s political noise in the US forced more stale USD-longs out of their positions. The dollar clearly needs outright good news to succeed a sustained rebound. We expect Yellen’s message to be positive, but balanced. This is probably not enough to change fortunes for the dollar short-term. Friday’s CPI and retail sales are a next important milestone
Yesterday, the Trump headlines clearly were a short-term negative for the dollar. On the other hand, there are signals that Republicans in Congress are stepping up efforts to strike a deal on healthcare in the near future. If so, the prospect for tax cuts might become more realistic further down the road. At some point, such a scenario could help to put a floor for the dollar. However, in a day-to-day perspective, it is probably too early to play this card.
EUR/USD: Political noise weighs on the dollar. EUR/USD sets new correction top
EUR/GBP
Technical picture: USD looking for a bottom
A combination of hawkish ECB comments and weaker US eco data pushed EUR/USD above the 1.1300/66 resistance area. The payrolls were not good enough to trigger a sustained USD rebound. A next resistance in the 1.15 area is looming. LT-correction tops stand 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 a first indication of a loss in upside momentum. EUR/USD 1.119 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 above the 112.13 correction top, but follow-through gains remain modest. So, the jury is still out. USD/JPY 114.37 resistance was tested, but for now the test is rejected. This at least suggests a pause in the recent USD/JPY uptrend. Sterling hit as market questions rate hike chances
Sterling was in the defensive yesterday. There were few eco data to guide trading. Some cautious comments from BoE Broadbent on the UK economy post-Brexit weighed on sterling. The rise in EUR/USD later in the session also supported EUR/GBP. EUR/GBP closed the session at 0.8925. Cable didn’t profit from the USD decline and closed the session at 1.2848.
This morning, there were again headlines from BoE Broadbent. In an interview, Broadbent indicated that he is not ready to support a rate hike anytime soon. This weighs further on sterling. Later today, the UK labour market data will be published. Employment growth is expected to remain solid, but wage growth to remain soft. If confirmed, this scenario won’t help sterling much. 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 some consolidation last week. However, a sharp short-squeeze propelled the pair north of 0.89 yesterday. Quite some sterling negative news should already be discounted at current levels. Even so, the short-term trend remains euro positive/sterling negative. A test of the 0.90 barrier might be on the cards.
EUR/GBP technical break higher
