Sunrise Market Commentary
- Rates: ECB meeting takes center stage
Any comments in the direction of policy normalization at today’s ECB meeting could be sufficient to put the Bund under new selling pressure. We think that the upside potential for the Bund is small even if Draghi plays a dovish card. It’s not a matter of if the ECB will make an announcement on winding down APP, but when they will make it. - Currencies: Will Draghi be soft enough to prevent further euro gains?
Yesterday, the EUR/USD rebound took a breather. Today, the Draghi comments at the ECB meeting will hold to key for the next directional move of the euro. We expect the ECB president to keep a balanced/soft approach. This might cap further euro gains. Of course, this doesn’t remove the recent USD negatives that are needed for a sustained EUR/USD correction
The Sunrise Headlines
- Energy and tech propelled the S&P 500 and Nasdaq to new closing highs. Asian markets follow WS on the way up.
- The Bank of Japan kept its monetary stimulus programme and interest rate target unchanged and pushed back the timing for reaching 2% inflation for a 6th time. It pledged to maintain the yield-curve control programme and asset purchases.
- The Australian unemployment rate stabilised, in line with expectations, at 5.6% in June. Employment rose by 14k, just shy of the 15k consensus forecast (38k in May), as full time jobs increased more than part time jobs declined.
- Senate legislation to undo Obamacare would increase the number of uninsured Americans by 32m in 2026 and cause premiums on individual plans to roughly double, the Congressional Budget Office concluded.
- Brent oil prices firmed further to above $49.6 as data from the EIA showed US crude oil and gasoline inventories dropped more than expected.
- US-China talks got off to a tense start as US Commerce Secretary upbraided China over the trade imbalance. Both nation did agree to start “constructive cooperation” to narrow the trade deficit, China’s foreign ministry said.
- The eco-calendar is dominated today by the ECB policy meeting. Other data of interest include the US initial jobless claims, the Philadelphia Fed Business Outlook and the UK retail sales.
Currencies: Will Draghi Be Soft Enough To Prevent Further Euro Gains?
Will Draghi ‘prevent’ further euro gains?
USD trading returned to some kind of normal yesterday after Tuesday’s USD selloff. The inability of the US government to amend Obamacare moved to the background as a driver for trading and there was no other high profile market theme. EUR/USD settled roughly between 1.1550/10, slightly off Tuesday’s correction top (1.1583). USD/JPY traded with a cautious negative bias, but the move was technically insignificant. USD/JPY closed the session at 111.97, marginally lower from Monday’s close at 112.07.
The BoJ kept its policy rate unchanged at -0.1% this morning. It will continue controlling the yield curve and keep the yield of 10-year JGB’s near 0.0%. The BOJ raised its growth forecast for 2017/2018, but again delayed to timing of reaching the inflation target. The yen weakened slightly on the prospect that the BoJ will lag the Fed and the ECB on the way to policy normalisation. USD/JPY returned north of 112. Australian labour data were solid. AUD/USD initially jumped to the 0.7989 area, but couldn’t maintain the gains. The pair trades again in the 0.7940 area. EUR/USD (1.1510 area) is losing a few more ticks as investors take partial profit on the recent rally ahead of the ECB policy decision.
There are second tier eco data in Europe and in the US (Jobless claims and Philly Fed business outlook) on today’s calendar. However, the focus for FX trading will be on the ECB’s policy decision. ECB Draghi is expected to keep a soft tone. Any concrete details on a reduction of asset purchases will probably be delayed till September. Even in such a scenario, the (FX) market might be sensitive to nuances, but it should be enough to slow the recent euro rally. If the ECB president gives already more specific guidance on policy normalisation, further euro gains are possible, but we think that the ECB currently wants to avoid this scenario. The recent euro rebound might take a breather if our scenario on a cautious ECB approach materializes. A modest correction is maybe possible. USDnegatives that affected trading of late are not out of the way yet. The recent euro rally might peter out, but we wait for a clear technical sign to position for an outright correction.
In a broader perspective, mediocre US wage growth, Yellen’s focus on the recent setback in inflation and soft eco data made markets question the pace of future Fed normalisation which weighed on USD. EUR/USD finally broke the 1.1489/1.15 resistance this week on the failure to replace Obamacare. The market discounts very little Fed policy normalisation in a longer term perspective. At some point this might lend the dollar support. However, in a day-to-day perspective, there is no reason to try to catch the falling USD. The dollar needs high profile good news and that isn’t available at this stage.
USD: technical picture worsened
EUR/USD rebounded above the 1.1300/66 resistance at the end of June. The payrolls and other recent data were not good enough to trigger a sustained USD rebound. Finally EUR/USD broke beyond the 1.1489/1.15 resistance, paving the way to the LT-correction tops at 1.1616/1.1714. A break would end the long consolidation that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area is not easy to break. We don’t preposition for a break, but the pressure is mounting. Return action below 1.13 would be a first indication of a loss in upside momentum. EUR/USD 1.1119/10 is the next support.
The USD/JPY rally ran into resistance in 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 the test was rejected. This suggests a pause in the recent USD/JPY uptrend. We stay cautious on USD/JPY long positions despite the recent decent performance.
EUR/USD: euro rally takes a breather ahead of ECB meeting
EUR/GBP
UK retail sales: a temporary support for sterling?
Sterling trading calmed down yesterday after Tuesday’s inflation-driven sell-off. There were no UK eco data and we also didn’t see Brexit headlines with market moving potential. EUR/GBP basically hovered in the mid 0.88 area. The modest decline in EUR/USD helped blocking the topside in EUR/GBP. The pair finished the session at 0.8842. Trading in cable was also order-driven and without a clear trend. The pair closed the session at 1.3022 (from 1.3040).
The focus will be on the UK retail sales today. The series was very volatile over the previous months. A modest rebound of 0.4% M/M and 2.5% Y/Y is expected after a steep decline in May. The BoE (and markets) will look out whether the erosion in disposable income due to the decline of sterling is becoming a real threat for spending. The consensus expectation isn’t that high given the May setback. A positive surprise is possible. This might be temporary supportive for sterling, but a really big overshoot is probably needed to trigger any sustained sterling gains. We also keep an eye at the Brexit negotiations in Brussels. However, it is probably too early to expect concrete results.
From a technical point of view, EUR/GBP recently broke above the 0.8854/66 resistance (2017 top) to set a new correction top north of 0.89, but the move 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 sterling rebound as technical in nature and don’t expect it to last very long. We still look to buy EUR/GBP on more pronounced dips. For that to happen, EUR/GBP probably needs some help from a correction in EUR/USD.
EUR/GBP: consolidation near recent top
