Sunrise Market Commentary
- Rates: US yields cruise above key technical levels, final confirmation after GDP?
Attention turns to the US with the first reading of third quarter GDP. Risks are on the upside of expectations which is negative for US Treasuries and can result in a weekly close above key technical yield levels which is a strong signal, paving the way for a new up-leg. The Bund’s outperformance could continue short term after the dovish ECB meeting. - Currencies: EUR/USD challenging 1.1662 support. Will US GDP force the break?
Yesterday, a soft ECB decision broke recent euro resilience. EUR/USD dropped to test the 1.1662 support. Today, the focus turns to the US Q3 GDP report. A good report might be supportive for the US currency. Of late, the dollar often failed to profit from good news or from additional interest rate support. Will this pattern change?
The Sunrise Headlines
- US stock markets closed near opening levels. Most Asian stock markets are positively oriented overnight with Japan outperforming on yen weakness. Chinese industrial profits jumped by the most since 2011 (27.7% Y/Y).
- Republicans have cleared a hurdle in their efforts to overhaul the US tax code for the first time in a generation with a successful vote in Congress that opened the way for the introduction of reform legislation.
- Catalan president Puigdemont ruled out calling a snap regional election that could have de-escalated the political crisis in the region, paving the way for the Spanish state to begin imposing direct rule over Catalonia.
- Amazon jumped 7.7% post-market after reporting sales and profit that exceeded expectations. Alphabet hit an all-time high in late trading as a surge in Google ads eased concerns about rising costs. Microsoft’s push into the cloud helped it beat estimates and even Twitter jumped after adding more monthly users.
- Japan’s core CPI marked a ninth straight month of annual gains in September (0.7% Y/Y), but failed to accelerate from the previous month, underscoring the central bank’s huge task as it struggles to meet an ever-elusive inflation target.
- Today’s eco calendar is thin with only Q3 US GDP and final University of Michigan consumer confidence
Currencies: EUR/USD Challenging 1.1662 Support. Will US GDP Force The Break?
EUR/USD tests 1.1670/62 support
Yesterday’s ECB decision to prolong APP by 9 months and half the amount of monthly purchases was on the soft side of expectations and so was the forward guidance. At first, the euro decline was modest but accelerated later in the session. Political chaos in Spain and overall USD strength accelerated the EUR/USD decline. EUR/USD closed the session at 1.1651 (from 1.1813). USD/JPY profited from a strong equity performance and finished the day at 113.98 (from 133.74).
Overnight, Asian equities mostly trade with decent gains, supported by strong earnings from several US bellwethers after the close on WS. USD/JPY makes some modest extra gain and trades in the 114.10 area. Japan September inflation was unchanged at 0.7% Y/Y; indicating that the BOJ should continue to ultra-loose monetary policy. EUR/USD continues trading with a slightly negative bias. Australian equities and the Aussie dollar are under pressure after a High Court decision erased the Turnbull government’s majority. AUD/USD dropped below 0.7650.
EMU area data are second tier today, but the first reading of US Q3 GDP is interesting. Markets expect 2.5% Q/Qa, slightly below Q2’s 3.1% Q/Qa. Given the damage of the hurricanes combined with good sentiment data recently, such an outcome should be considered encouraging. It keeps the way open for the Fed to raise rates in December. We see upside risks due to strong business investment but the composition will be less good than in Q2. Consumption will have slowed but this will be offset by stronger inventories, business investment and maybe a small positive contribution of net exports
The euro traded strong in the run-up to the ECB decision. At the same time, the dollar failed to gain against the single currency even as interest rate differentials have risen sharply since early September. This trading dynamics was broken after yesterday’s ECB decision. Policy divergence between the ECB and the Fed is again on the radar of (FX) markets, at least for now. Yesterday’s EUR/USD decline was mainly euro weakness, not USD strength. However, a good US Q3 GDP might trigger some further EUR/USD follow-through selling especially as the technical picture turned more negative for EUR/USD (see infra). A EUR/USD sell-on upticks bias is favoured. That said, any additional interest rate support for the dollar will probably modest after the recent widening. There is not that much room for Bund outperformance given current low yield levels. So, any further EUR/USD decline might develop in a gradual way.
From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern, but until yesterday there was no sustained follow-through price action. The pair currently tries to break below the 1.1670/62 support. If confirmed, it would be negative for the EUR/USD. EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside target on the charts. The USD/JPY momentum was positive in September. The pair regained 110.67/95 resistance, a short-term positive. The 114.49 correction top is the next resistance. Sentiment improved last week. The range top is within reach, but we don’t preposition for a sustained break higher.
EUR/USD tries to break below 1.1662 support. If confirmed, the ST picture would turn negative
EUR/GBP
EUR/GBP returns below 0.89on euro weakness
Sterling lost momentum yesterday as the positive impact from Wednesday’s better than expected UK Q3 GDP faded. There were again divergent views reported from the UK conservative party on how to address Brexit. This weighed on sterling. The CBI retail sales gauge dropped from +42 to -36, the lowest level since 2009. In the afternoon, sterling lost further ground against a broadly stronger dollar. Cable closed the session at 1.3161 (from 1.3262). EUR/GBP declined substantially in line with the overall setback of the euro after the ECB policy decision. EUR/GBP closed the session at 0.8854 (from 0.8909).
The UK eco calendar is empty today. So Brexit and the overall performance of the euro in the aftermath of the ECB decision might be the drivers for sterling trading. EUR/USD dropping below a first support might keep the single currency in the defensive short-term. This might weigh on EUR/GBP. Cable might cede further ground though in case of an improving USD sentiment. In this context, any further EUR/GBP losses might remain modest. We maintain a EUR/GBP buy-on-dip bias but are in no hurry to add exposure until we see signs that the post-ECB euro correction is slowing down.
EUR/GBP staged a strong uptrend from April till late August with a top at 0.9307. Rising UK inflation and the BoE preparing markets for a rate hike caused a sterling rebound, but it has run its course. EUR/GBP recently tried to regain the 0.89 area, but until now there were no follow-through gains. A drop below the 0.8855 area might open the way for a return to the supports at 0.8743 or maybe even 0.8652. However, we still consider this area as tough to break
EUR/GBP tests first minor support on the overall decline of the euro
