Sunrise Market Commentary
- Rates: US inflation data key with Fed comments in mind
US inflation data will probably be determining for today’s trading session. Recent warnings by several Fed governors suggest that a downward surprise could spook markets and question the Fed’s tightening intentions. In that case, US Treasuries could profit, outperforming Bunds. - Currencies: Key US data to decide on next directional USD move
The dollar shifted in wait-and-see modus after recent Fed comments on inflation. Today’s US data, including CPI and retail sales, might decide on the fate of the US dollar. Strong data are needed for markets to give further credence to the pace of Fed policy normalization and to prevent further USD losses
The Sunrise Headlines
- US stock markets eked out small gains (+0.1%-+0.2%) in an uneventful US trading session. Overnight, Asian stock markets trade mixed with Japan outperforming (+0.5%) and China underperforming (-0.2%).
- Britain has for the first time explicitly acknowledged it has financial obligations to the EU after Brexit, a move that is likely to avert a full-scale clash over the exit bill in talks next week.
- Fed chair Yellen has given the strongest signal yet that regulators are planning to relax a contentious financial safety standard for big banks (eSLR) that executives have complained could perversely encourage them to take more risk.
- Fed Governor Brainard said she’s "most focused on getting inflation back up around our 2% target." Dallas Fed Kaplan also said he needs to see inflation moving toward the central bank’s goal as he assesses further rate hikes.
- Fitch maintained its A+ rating on China with a stable outlook, citing the strength of the country’s external finances and macroeconomic record. ST growth prospects remain favourable, and economic policies have been effective in responding to an array of domestic and external pressures in the past year.
- Republicans launched their latest attempt to secure a longed victory on US healthcare by dropping a planned tax rollback for the wealthy. The new bill already drew criticism from senators on both sides of the political divide.
- Today’s eco calendar heats up in the US with CPI inflation, retail sales, industrial production and Michigan consumer confidence. JP Morgan, Citigroup and Wells Fargo publish Q2 earnings.
Currencies: Key US Data To Decide On Next Directional USD Move
US CPI to decide on dollar’s fate?
There was no dominant story to guide FX trading yesterday. The dollar remained in the defensive in the wake of Yellen’s testimony on Wednesday, but the pressure eased. Markets awaited today’s key US data. EUR/USD dropped temporary below 1.14, but rebounded on rumours that ECB’s Draghi might herald a policy change at Jackson Hole. EUR/USD closed the session at 1.1398. USD/JPY finished at 113.28.
Asian equities are trading mixed, awaiting key US data later today. Japanese equities outperform as USD/JPY regained the 113 mark. Markets are looking forward to next week’s BOJ policy meeting. The BOJ is expected to maintain its cap on the 10-year government bond yield even as rates in other major economies are trending higher. The pair trades in the 113.40 area. The Aussie dollar maintains this week’s gain and is near the 0.7750/0.7835 resistance area. EUR/USD remains in wait-and-see modus, holding in the low 1.14 area.
There are again no market moving European eco data today. However, US data might be decisive for the next directional move of the dollar, with June retail sales, CPI & production and July Michigan consumer confidence. Especially the retail sales and CPI are key. Core and headline CPI are both expected at 1.7% (0.2% M/M and 0.1% M/M). Retail sales are expected to regain traction after mediocre May data (but strong readings in March and April). Consensus expectations are not very high, both for the retail sales and the CPI. If inflation drifts further away from the 2%-mark (<1.7 % outcome) , it will almost certainly cause a further loss of interest rate support for the dollar. Consumer confidence from the University of Michigan is expected little changed at a high level (95).
Dollar sentiment remained fragile after Friday’s payrolls. Yellen putting the focus on inflation made markets ponder the pace of Fed normalisation and weighed further on the dollar. Yesterday, the dollar decline took a breather, but the picture US currency’s technical picture remains fragile. As we see a good chance for the data to meet the consensus, the dollar might start looking for a bottom after the recent setback. However, the is little room for miss, especially not for the CPI.
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: Today’s data to decide on next USD move
EUR/GBP
Sterling rebound to slow?
Sterling regained further ground yesterday, extending the rebound that started after good UK labour data. We see the rebound in the first place as technical in nature. Cable profited from underlying USD softness. A topside test of EUR/GBP was rejected on Wednesday and the broader euro correction also triggered further profit taking on EUR/GBP longs. The UK government published the Brexit ‘Repeal Bill’. It will probably become a source of political noise, but we didn’t see a big impact on sterling trading yesterday. BoE’s McCafferty further complicated the BoE’s monetary policy debate as he raised the issue of reducing the BoE’s Balance sheet. His comments might have been slightly supportive for sterling. EUR/GBP closed the session at 0.8809. Cable finished the day at 1.2939.
There are no important eco data in the UK today. There might still be some political noise on the Repeal bill, but we don’t expect it to change fortunes for the UK currency right now. So, the gyrations in the dollar might be decisive for sterling trading. The UK currency made a nice ST rebound, especially against the euro. This move might slow.
From a technical point of view, EUR/GBP set a minor top north of 0.8854/66 resistance (2017 top) and finally broke below the 0.8 barrier 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. A break below 0.8720 would suggest that upside momentum is easing.
EUR/GBP topside test rejected, for now
