Sunrise Market Commentary
- Rates: Counting down to tomorrow’s US eco data
Today’s eco calendar won’t inspire trading. In light of most recent events (Yellen’s Testimony), we expect that core bonds could correct somewhat higher without eking out technically relevant levels ahead of tomorrow’s important US eco releases (CPI & retail sales). - Currencies: Dollar stays soft post-Yellen
The dollar was in the defensive ahead of Yellen’s testimony before Congress. This picture didn’t change as markets focus on Yellen’s inflation comments. EUR/USD stabilizes near the recent top. USD/JPY corrects south. The dollar needs outright good news and that probably won’t come today. The focus turns to tomorrow’s US CPI and retail sales
The Sunrise Headlines
- US stock markets gained up to 1.1% after Fed Yellen’s testimony suggested that the central bank gives some additional weight to disappointing inflation, suggesting a slow tightening cycle. Asian markets copy WS overnight.
- China reported better-than-expected June trade data, suggesting the economy is holding up well thanks to firmer global demand, despite a cooling property market at home amid a financial crackdown that has put firms under pressure.
- The US economy expanded at a ‘slight to moderate’ rate in June, with the labour market continuing to tighten and price growth still modest, the Federal Reserve said in its anecdotal Beige Book report.
- The Bank of Korea held its seven-day repo rate unchanged at 1.25%, after last cutting rates by 25 bps in June 2016. The Korean won firmed though as the BoK upgraded GDP forecasts.
- Senate Majority Leader McConnell faced intensifying pressure from President Trump to push through a health-care overhaul next week, but he appeared to make little progress in bridging the deep divides imperilling his party.
- The German government has expanded its powers to block the takeover of German companies amid growing concerns in Berlin at the scale of Chinese deal making in the German high-tech sector.
- Today’s eco calendar is thin with only final national EMU inflation data, US weekly jobless claims and US PPIO. It’s the second day of Yellen’s testimony before US Congress and Therese May presents her Repeal Bill to UK parliament. The US, Ireland and Italy tap the market
Currencies: Dollar Stays Soft Post-Yellen
USD declines further on ‘political noise’
The dollar started the session on a weak footing yesterday as markets pondered the potential fall-out from the Trump Jr. emails. Gradually, the focus turned to Yellen’s statement before Congress. Yellen stayed close to the Fed’s assessment from June, but indicated that soft inflation needs close monitoring. The USD reaction was mixed. USD/JPY stayed under pressure even as equities rallied. The pair closed the session at 113.17. EUR/USD reversed an initial topside test to finish the day at 1.1412.
Asian equities join the post-Yellen rebound on WS, but there is a loss of momentum as the session evolves. Strong Chinese foreign trade data (both imports and exports stronger than expected) are supporting Chinese and Australian markets. Chinese data and an overall soft dollar propelled AUD/USD close to the 0.77 mark. USD/JPY underperforms despite recent attempts by the BoJ to cap the rise in Japanese yields. USD/JPY hovers in the low 113 area. EUR/USD trades in the 1.1440 area, holding within reach of the recent top.
Today, there are again only second tier eco data in Europe. In the US, jobless claims and the PPI producer prices will be published. Headline and core PPI are expected to rise 0.2% M/M, but Y/Y-measures are expected to ease to 1.9% and 2.0% respectively. The focus will be on tomorrow’s key US data (CPI, retail sales, Michigan confidence). However, disappointing PPI data might keep the dollar in the defensive. Yellen will bring the second part of her semi-annual testimony before the Senate. Fed’s Brainard will also speak. She spoke rather soft of late.
Dollar sentiment remained fragile after Friday’s payrolls. The potential political fall-out Donald Trump Jr’s leaked emails was an additional source of USD caution. Yesterday’s assessment of Fed’s Yellen before Congress was balanced, but the market gave most weight to some pockets of Fed softness on inflation. This keeps the dollar in the defensive, even as the reaction was slightly different across USD cross rates. We expect USD softness to persist going into tomorrow’s US CPI and retail sales. The dollar needs outright good news to succeed a sustained rebound and this news probably won’t to come today, keeping the dollar near the recent lows. US politics remain a wildcard. Of late, the political headlines were USD negative. We also keep a close eye on whether Congress can reach a deal on healthcare in the near future. If realized, the political context might become less USD negative. For now, this is only hypothetical thinking and it is too early to play this card in a daily perspective.
Technical picture: USD looking for a bottom
A combination of hawkish ECB comments and soft US data pushed EUR/USD above the 1.1300/66 resistance area end June. The payrolls were not good enough to trigger a sustained USD rebound. 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 1.1119/10 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. 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. We stay cautious on USD/JPY long positions despite the recent good performance.
EUR/USD stays near correction top post-Yellen on broad-based USD softness
EUR/GBP
Brexit to return as factor for sterling trading?
Sterling was again in better shape yesterday after a sharp correction on Tuesday. The May UK labour market report was solid. The unemployment rate dropped to a multi-decade low of 4.5% and job growth was stronger than expected. Weekly earnings rose modestly from 1.8% Y/Y to 2.0% Y/Y (1.9% Y/Y was expected). This leaves real wage growth negative given a May inflation reading of 2.9%. The jury is still out what this means for the August BoE policy decision, but the report was good enough to trigger profit taking on sterling shorts. EUR/GBP returned below the 0.89 barrier and closed the session at 0.8857, reversing most of Tuesday’s gain. Cable also rebounded, partially supported by underlying USD softness. The pair finished the day at 1.2885.
Overnight, the UK RICS house price balance was weaker than expected (7% vs. 15%). The report has little impact on sterling trading. Markets will keep a close eye of the Brexit ‘Repeal Bill’. This will provide the groundwork for post-Brexit UK legislation. The approval will be key for May’s political fate. Of late, Brexit and political issues were only of second tier importance for sterling trading. Political uncertainty might return to the forefront, at least temporary.
From a technical point of view, EUR/GBP set a minor top north of 0.8854/66 resistance (2017 top), but initially a sustained break didn’t occur. However, a sharp short-squeeze propelled the pair north of 0.89 earlier this week. 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 needs to be confirmed
