Sunrise Market Commentary
- Rates: ECB doesn’t have to follow Fed’s playbook
ECB Nowotny said after European trading that the ECB doesn’t have to follow the Fed’s playbook when normalizing monetary policy. He suggests that the ECB could hike (deposit) rates before ending QE. This could weigh on the Bund in the opening. Today’s eco calendar only contains second tier US eco data, suggesting consolidation ahead of the weekend. - Currencies: From dollar softness to euro strength
The dollar initially stabilized yesterday after the post-FOMC setback. Later in the session, hawkish comments from ECB’s Nowotny propelled EUR/USD to the highest level in one month. We look out how far the post-FOMC USD correction has to go. Will today’s US consumer confidence be strong enough to block the USD correction?
The Sunrise Headlines
- US equities returned part of the FOMC-gains and closed slightly lower on the day. Overnight, most Asian stock markets trade positive with Japanese stocks underperforming (-0.4%).
- The ECB might move away from loose monetary policy in a different way than the Fed, ECB Nowotny said. The US model was to finish bond purchases first, but this model might not transfer well to Europe.
- Moody’s improved to outlook on Brazil’s Ba2-rating from negative to stable driven by expectation that downside risks are abating and macroeconomic conditions stabilizing, with the economy showing signs of recovery, inflation falling and the fiscal outlook clearer.
- The Czech central bank is likely to end a regime to keep the crown weak around the middle of the year, Vice-Governor Hampl was quoted as saying, adding a later exit was also possible.
- Greece and its international creditors remain divided over the terms of a review of the country’s bailout programme, a senior euro zone official said, a gap that will prevent Athens from getting fresh financial aid at Monday’s Eurogroup.
- Conservatives in Congress are pushing Donald Trump to block the IMF from participating in a European-led bailout of Greece, as his administration signalled it would take a tougher line with global institutions.
- Today’s eco calendar is uneventful with only US industrial production and University of Michigan consumer confidence. G20 finance chiefs gather in Germany and Donald Trump meets Angela Merkel
Currencies: From Dollar Softness To Euro Strength
Euro extends gains on Nowotny comments
Yesterday, the dollar initially stabilized versus euro and yen, following substantial losses in the aftermath of the FOMC decision. European equities started strongly, but gave back half of the initial gains. So, no full-blown risk-on session. Late in the session, the euro was propelled by comments ECB’s Nowotny who said rates could be raised before the end of the APP. The comments were soon dismissed by ECB’s Praet, but the euro maintained its gains. EUR/USD closed the session at 1.0766 (from 1.0734). The swings in USD/JPY were much more modest. USD/JPY finished the session at 113.31 (from 113.38).
Overnight, Asian equities are mostly slightly higher. Post-Fed dollar correction and expectations that Fed policy normalisation will continue in a very gradual way is supporting regional equities ex-Japan. USD/JPY is holding yesterday’s post-Fed consolidation pattern (lower half of the 113 big figure). EUR/USD maintains the gains recorded on the Novotny comments and trades in the 1.0775 area, near a one month high.
Today, there are only second tier eco data in Europe. In the US, production and Michigan consumer sentiment have some market moving potential. US February industrial production is expected to have rebounded (0.2% M/M) following a weather-related 0.3% M/M drop. Michigan consumer sentiment is expected slightly higher at 97 from 96.3. A strong labour market, strong equities and lower gasoline prices support sentiment. So, we see upside risks. Yesterday, the dollar stabilised after the post-Fed correction, but failed to regain ground. On the contrary, the US currency lost further ground against euro as markets ponder the chances of an early change in the ECB policy. In a longer term perspective, policy divergence between the Fed and the ECB will probably remain big enough to support further USD gains. Yellen suggested that, considering the eco developments, the Fed policy might be relatively close to the ‘dot-path’. The dayto- day USD momentum remains soft though and the euro is in better shape. So we look out/wait for strong enough US data that might put a floor on the current USD correction. Interesting to see whether a strong consumer confidence can help this process
Global context. EUR/USD 1.0874 resistance remains the line in the sand with intermediate resistance at 1.0829. We maintain the view that a sustained break of EUR/USD above this area will be difficult, even after Wednesday’s Fed message. The US/German (EMU) interest rate differential remains at an absolute high level. Especially at the short end of the curve, the differential might even rewiden. The fundamentals/ interest rate differentials are also supportive for USD/JPY, but of late the momentum/technical picture is not really convincing. We maintain the working hypothesis that the 111.60 range bottom should hold.
EUR/USD extends post-Fed rebound on hawkish comments from ECB’s Nowotny
EUR/GBP
EUR/GBP: Balance of sterling rebound and euro strength
EUR/GBP and cable held very tight ranges yesterday as investors awaited the BoE’s policy decision. The BoE as expected left its policy unchanged. However, Kristin Forbes dissented in favour of a rate hike and the Minutes contained a note of concern on inflation. ‘Some members noted that it would take relatively little further upside news on the prospects of activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.” This took sterling traders awry and triggered some frenetic sterling buying. EUR/GBP dropped from 0.8740 to about 0.8680/70. Later in the session, EUR/GBP regained some ground on the Nowotny comments. EUR/GBP closed the session at 0.8710 (from 0.8732). The combination of USD softness and GBP strength propelled cable to close the session at 1.2360 (from 1.2291).
There are no important eco data in the UK today. Both sterling and the euro were in good shape yesterday. This balance might persist and some EUR/GBP consolidation might be on the cards. Despite yesterday’s somewhat more hawkish BoE approach, we don’t see a real risk for BoE tightening anytime soon. So, any rebound of sterling shouldn’t go too far.
Over the previous day, the decline of sterling took a breather. EUR/GBP cleared 0.8592 resistance, improving the MT technical EUR/GBP picture. We don’t expect a sustained EUR/USD rebound, but a combination of temporary euro consolidation and ongoing sterling softness, as the Brexit negotiations are nearing, might trigger some more ST EUR/GBP gains. The 0.8854 correction top is the next key resistance. The nervous swings over the previous days suggest that a clear break beyond 0.8854 will be difficult without important (UK negative) news.
EUR/GBP: euro strength and sterling rebound keeping each other in balance
