Sunrise Market Commentary
- Rates: Consolidation into Fed meeting?
Today’s eco calendar is uneventful and scheduled ECB governors probably won’t touch on monetary policy. We expect US Treasuries to consolidate going into Wednesday’s Fed meeting, keeping US yields below key resistance levels. On European markets, the Bund sell off continued on Friday on rumours that the ECB discussed hiking rates before ending QE. - Currencies: EUR/USD rebounds on USD softness and ECB rate hike rumours
On Friday, solid payrolls were not enough to support further USD gains. At the same time, euro traders were spooked by rumous that some ECB members advocated an ECB rate hike ahead of QE tapering. Today, USD consolidation/softness might be on the cards ahead of the FOMC decision. Will ECB speculation continue to support the euro?
The Sunrise Headlines
- US equities closed the session with modest gains (S&P 0.33%) after a late session up-move that erased post-payrolls losses. Asian stocks start the week on a positive note as the dollar remains weaker.
- Oil continues its slide for the fourth consecutive session, still on fears that increased shale oil production offsets the OPEC production cut.
- Mr. Macron would get 26% of the vote in the first round of the French elections, up 2% points from a week ago, according to a BVA poll. Ms.Le Pen’s support was unchanged (26%), while Francois Fillon’s climbed one point to 20%.
- Contrary to bullish market reaction, the ECB didn’t signal a coming change to its policy mix, because officials concluded that the outlook for inflation hadn’t improved much since December, the Belgian governor Smets told the WSJ.
- ECB policy makers considered whether rates could rise before their bond-buying program comes to an end, according to people familiar with the matter.
- The Icelandic government announced that effective Tuesday it will lift almost all of the remaining capital controls, allowing its citizens, corporations and pension funds full access to the global capital markets.
- Today’s calendar is uneventful, but later this week US data (retail sales and CPI) and central bank meetings (FOMC, BoE, BOJ, Norges Bank, SNB) colour trading
Currencies: EUR/USD Rebounds On USD Softness And ECB Rate Hike Rumours
EUR/USD 1.07 on USD softness and ECB rumours
On Friday, the strong US payrolls, confirming a healthy labour market, was largely discounted and unable to trigger another up-leg in yields. The dollar even fell prey to a buy-the-rumour, sell the fact reaction. At the same time, there were rumours that (some) ECB members had discussed the scenario of a rate hike before ending the bond buying programme. These rumours also supported the euro. EUR/USD finished the session at 1.0673 (from 1.0577). USD/JPY dropped back low 115 to close the day at 114.79.
Overnight, Asian equities show modest to moderate gains. The soft reaction (yields & USD) to Friday’s payrolls is supportive for regional markets. The dollar is holding near the post-payrolls lows. USD/JPY trades in the 114.70/75 area. EUR/USD remains also well bid on ECB rumours (see higher). ECB’s Smets in a WSJ interview said that the ECB didn’t signal a change in policy stance. Even so, EUR/USD trades near1.07.
Today, speeches of ECB Liikanen, Lautenschlaeger and Draghi will address nonmonetary policy issues. Later this week, the focus is on the FOMC meeting & Dutch elections. In the Dutch parliamentary elections (Wednesday) the score of the far right PVV party of Wilders will get attention. If he scores well, it might raise fears that Le Pen might also do well in the French election. Regarding the FOMC, a rate hike is fully discounted (98%). Attention will go to the press conference and the economic and rate projections. We raised our expectation to four rate hikes this year, but we doubt this will already be seen in the median 2017 rate projections (3 hikes). It is more likely for the 2018/2019 median projection to be raised from 3 to 4 rate hikes. The payrolls were not strong enough to trigger further USD gains. At the same time, rumours on a future change in the ECB policy supported a euro rebound. Short-term, the dollar needs additional positive news to start a new up-leg (e.g. a higher Fed rate hike path/dots). As such a signal won’t come before Wednesday, some USD softness might persist. The Dutch elections are in theory a negative for the euro. However, the market is currently more nervous on the ECB rate hike rumours. We maintain a USD positive bias MT/LT, but we don’t feel to rush in to add EUR/USD shorts at this stage. The correction might have some further to go.
Of late USD/JPY profited most from higher core/US bond yields. The 115.62 range top, came within reach on Friday, but a real test didn’t occur. Some shortterm consolidation might be on the cards. Recent gains of the dollar against the euro were less convincing. A first intermediate resistance at 1.0679 is broken. We still assume EUR/USD 1.0829/74 will be difficult to regain. A sell EUR/USD on upticks remains favoured, but the correction might have some further to go.
EUR/USD: rebounds despite soft payrolls as markets ponder rumours on ECB rate hike
EUR/GBP
EUR/GBP extends uptrend on euro strength
On Friday, the UK data were close to expectations and didn’t change the assessment of the UK economy. Their impact on sterling was negligible. Sterling basically continued the trends from the previous days. EUR/GBP extended its gradually uptrend. Rumours that the ECB might consider raising rates before the end of the APP programme accelerated the EUR/GBP rebound. The pair closed the session at 0.8776 (from 0.8695). Cable hovered near the recent lows mostly in the upper half of the 1.21 big figure. The inability of the dollar to make any progress on the payrolls blocked the downside. The pair closed the session at 1.2167.
Today, there are no important UK data. The focus will again be on Brexit, as the debate on the Brexit bill returns to the House of Commons. It will debate on the amendments of the House of lords. There is still some uncertainty whether PM will have enough backing from her own conservative Party to overrule the amendments of the Lords. The internal rift in the Conservative party is a slightly negative for sterling. However, main scenario remains that Article 50 will be triggered before the end of March. Sterling sentiment softened of late. The euro was in better shape helping EUR/GBP to break the 0.8592 resistance, which improved the technical short-term EUR/GBP picture. We don’t expect a sustained EUR/USD rebound , but a combination of temporary euro consolidation and ongoing sterling softness might trigger some more ST EUR/GBP gains. The break north of 0.8645 reinforced the ST positive momentum. The 0.8854 correction top is the next key resistance.
EUR/GBP uptrend continues. 0.8854 Jan. top is next key resistance
