Sunrise Market Commentary
- Rates: Wait-and-see ahead of Thursday’s ECB?
Today’s thin eco calendar probably won’t impact trading. Q2 earnings reports could influence markets via risk sentiment. Overall, we expect trading to remain confined to tight ranges ahead of Thursday’s ECB meeting. Rumours could cause some volatility, but shouldn’t have a lasting impact. - Currencies: Dollar struggles, but EUR/USD doesn’t set new correction top
Soft US data kept the dollar in the defensive on Friday, but EUR/USD wasn’t able to overcome the 1.1489/1.15 resistance area. Are investors turning a bit more cautions on additional euro longs going into Thursday’s ECB policy meeting?
The Sunrise Headlines
- WS closed with gains as Fed hike expectations were lowered (S&P500 +0.47%). Asian trading opened with an uptick on this positive sentiment. Chinese equities initially sold off but recovered, together with the other Asian markets, after the better than expected China data. Japan has an official holiday today.
- China’s GDP increased 6.9% in Q2 Y/Y (1.7% Q/Q), higher than the 6.8% estimate and matching the Q1 growth pace, thanks to robust industrial output, retail sales and exports. A slowdown is expected in the next quarters.
- Brexit Secretary David Davis and EU’s Michel Barnier are set to launch a first round of negotiations on Britain’s withdrawal from the EU today. Three more weeks of talks will follow from late August until early October.
- The US senate majority leader announced that he’s postponing the debate on the controversial Republican health care bill as one of the potential Senate backers, John McCain, will be recovering from unexpected surgery this week.
- The eco-calendar is wafer-thin today with the only data of note being the EMU final June CPI and the US July Empire manufacturing. There will be no Fedspeak this week as the blackout period kicks off today
Currencies: Dollar Struggles, But EUR/USD Doesn’t Set New Correction Top
Dollar holds near the recent lows
US CPI was marginally softer than expected last Friday. Retail sales showed quite a substantial miss. US yields and the dollar declined as markets positioned for slower Fed-policy normalisation. EUR/USD rebounded, but a but a real test of the recent top (1.1489) didn’t occur. The pair closed the day at 1.1470. USD/JPY was hit harder, even as US equities reacted in a positive way. The pair finished the day at 112.53.
China Q2 GDP printed stronger than expected at 6.9 Y/Y (6.8% was expected) this morning. June retail sales and industrial production also beat consensus by a substantial margin. Mainland Chinese stock markets were under pressure though on concerns of more financial regulation, but sentiment improved after the publication of the data. USD/JPY (112.60 area) tries to find a bottom after Friday’s losses. AUD/USD is holding stable in the low 0.78 area after last week’s impressive gains. The kiwi dollar (NZD/USD 0.7330) lost slightly ground on RBNZ comments that a lower NZD would help rebalancing growth. EUR/USD (1.1460) is holding within reach of the recent top, but no test had occurred yet.
EMU June final CPI is expected to be confirmed at 1.3%Y/Y today. This should have little impact on markets even if ongoing soft inflation might ease markets’ expectations that the ECB will already give concrete hints on a scaling back of policy stimulation at this week’s policy meeting. The prospect for a cautious ECB might slow further euro gains after the recent rally. In the US, the Empire manufacturing survey is expected to ease from a strong 19.8 to a still solid 15.0 in July. The focus for (FX) trading is on price data rather than on activity data. So, even a good report probably won’t help the dollar much. This week, the US earnings season will come in full swing. Of late, the dollar, including USD/JPY was more sensitive to price data/yields than to the US equity performance. So, it’s not evident that good US earnings will be a big help for the dollar
The dollar remained in the defensive last week. Mediocre US wage growth in the payrolls, Yellen’s focus on the recent setback in inflation and soft eco data made markets doubting the pace of future Fed normalisation and weighed on the dollar. Especially USD/JPY looks quite vulnerable. On the other hand, EUR/USD didn’t set a new short-term top after Friday’s disappointing US data. We don’t draw any firm conclusions yet. Is this an indication that already quite some bad news for the dollar/good news for the euro is discounted at current levels. We don’t row against the tide yet, but look out whether the 1.1489/1.15 resistance holds.
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 decent performance.
EUR/USD: soft US data keep pair well supported, but no sustained break higher yet
EUR/GBP
Cable breaks above 1.3000/50 resistance
There was hardly any UK specific news to guide sterling trading today. There were plenty of press articles on the UK accepting the principle of a financial settlement, but the debate had no impact on sterling trading. EUR/GBP initially held an extremely tight sideways range around the 0.88 pivot. Late in the session, cable clearly outperformed EUR/USD after disappointing US eco data. EUR/GBP closed the session at 0.8754. Cable finished the week strong and closed above the 1.3050 resistance.
Overnight, Rigthmove House prices rose 0.1% M/M and 2.8% Y/Y. There are no other important UK eco data today. The focus will therefore be on the next episode in the Brexit negotiations that will start today. Of late Brexit wasn’t a big issue for sterling trading. If there is no substantial progress in the Brexit-talks and if more division occurs within the UK conservative party, the recent sterling rebound could slow.
From a technical point of view, EUR/GBP recently set a minor top north of 0.8854/66 resistance (2017 top) and temporary broke below the 0.89 barrier but the move finally fell prey to profit taking (sterling short squeeze). A break below 0.8720 would suggest that upside momentum is easing. For now, we see the current sterling rebound as technical in nature and we don’t expect a sustained rebound. Even so, we look to how the technical break in cable turns out. We don’t row against the ST positive sterling tide yet
EUR/GBP topside test rejected, for now
