Sunrise Market Commentary
- Rates: Core bonds little moved after Fed meeting.
The FOMC statement upgraded the economic situation to “solid” from “moderate” confirming its intention to raise rates in December. Today, Trump’s announcement of the nomination of Mr. Powell as next Fed chair and the BoE rate hike will be the focus, but as these events are largely anticipation, the effect on core bonds should be modest ahead of the US payrolls. - Currencies: Dollar fails to extend gains
The dollar was better bid at the end of last week, but for now there are no follow-through gains. Today’s eco data are no market movers for the dollar. A cautious risk-off sentiment and ‘political issues’ might keep USD bulls on the sidelines ahead of tomorrow’s US payrolls. EUR/GBP is testing key support as the BoE is largely expected to raise its policy rate today.
The Sunrise Headlines
- US equity indices ended narrowly mixed yesterday as strong opening gains gradually evaporated. Asian equities trade with modest losses overnight except for Japan that goes up about 0.5%.
- Jay Powell is expected to be the US president’s nominee to serve as the next chair of the Fed, according to two White House officials. An official announcement is expected today.
- The BOE is set to increase rates for the first time in a decade. Mark Carney may signal even more tightening if the economy performs in line with new forecasts, but that’s unlikely.
- The Fed reinforced expectations for a December rate hike. FOMC officials upgraded the economic activity to solid from moderate previously. It confirmed they expect inflation to eventually reach the 2% target.
- The House GOP tax bill expected today will impose a one-time tax of 12% on U.S. firms’ offshore cash earnings. Tax writers also plan to phase out the 20% proposed corporate rate after a decade. Other measures include removing estate tax and restrictions on certain tax deductions.
- Australian dollar rallies the most in three weeks as trade and building data for September beat estimates. AUD/USD jumps again above the 0.77 handle.
- US and EMU eco data are unlikely to have much market impact, but the BoE meeting and Trump’s Fed announcement will be highlights. Corporate earnings reports out today include Apple, Alibaba, Hugo Boss, Royal Dutch Shell, Credit Suisse and L’Oreal. Spain and France tap the bond market
Currencies: Dollar Fails To Extend Gains
USD fails to extend gains
On Wednesday, the dollar traded with a cautiously positive bias. The US eco data (ADP, ISM) were OK but close to expectations. The Fed left its policy unchanged. It kept a positive assessment on the economy, leaving the door open for a December rate hike. ‘Political issues’ were a source of caution for USD bulls. Markets are pondering the impact of president Trump likely nomination of Mr. Powell as next Fed chairman. There is also a lot of uncertainty on the new tax bill. EUR/USD finished session at 1.1619 (from 1.1646). USD/JPY finished at 114.19 (from 113.64) but the key 114.45 area stays out of reach.
Overnight, Asian equities outside Japan mostly trade with modest losses. The US equity rally shows signs of fatigue. This weighs on Asian indices and on US yields. It also prevents the dollar to return to the recent highs against the euro and the yen. USD/JPY returned below the 114 handle while EUR/USD trades again in the mid 1.16 area. The Aussie dollar regained some ground after last week’s setback supported by stronger than expected eco data. AUD/USD regained the 0.77 mark.
Politics rather than data to guide USD trading.
The EMU eco calendar contains only the final manufacturing PMI report and the German unemployment data, no market movers. In the US, the weekly initial jobless claims and the Q3 productivity figures are up for release. US president Trump is expected to nominate Jerome Powell as the next Fed Chairman. Markets also continue to look forward to additional details on the Tax reform plans. The proposition of tax cuts as such is a USD positive, but markets also want details on how these cuts will be funded. A lack of details on this issue might cap any further USD enthusiasm. Markets will also look forward to tomorrow’s US payrolls
The dollar made a new up-leg at the end of last week. The move was partially a repositioning out of the euro after a soft ECB assessment. At the same time, the US data/news flow as was also USD supportive. The dollar maintained those gains this week, but there were no additional gains. Today, we keep a neutral to cautiously negative bias on the dollar. The data won’t help and a cautious risk-off sentiment, recently often weighed more on US yields than on European ones. USD investors will look forward to tomorrow’s US payrolls. LT we maintain a cautious EUR/USD sell-on-upticks bias. Of late, the dollar failed to gain against the euro despite widening interest rate differentials since early September. This trading dynamic was broken after the ECB decision last week Policy divergence between the ECB and the Fed is again on the radar. However, any additional rate support for the dollar will probably be modest near term, especially if Powell is nominated to succeed Yellen. So, further EUR/USD decline might develop gradually.
From a technical point of view, EUR/USD dropped below 1.1670/62 support, but there are no convincing follow-through gains yet. If the break is confirmed, it would signal that the recent EUR/USD uptrend is broken. EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside target on the charts. USD/JPY’s momentum was positive in September. The pair regained 110.67/95 resistance, a positive. The 114.49 correction top is the next resistance. Sentiment improved last week, but the first test on Friday failed. We don’t preposition for a sustained break higher.
EUR/USD broke below 1.1662 support, but breaks still needs to be confirmed
EUR/GBP
Sterling tests 0.8740/50 support ahead of BoE
Yesterday, sterling made some intraday swings against the euro, but at the end of the day the changes were limited. The UK eco data, including the UK manufacturing PMI, came out slightly stronger than expected. EUR/GBP touched a minor correction low after the report. However, a sustained break below 0.8743 support didn’t occur. EUR/GBP finished the session at 0.8772; hardly changed from Tuesday. Cable finished the session at 1.3245 (from 1.3283).
Today, the UK construction PMI sis expected to rebound slightly from 48.1 to 48.5. However, the focus will be on the BoE policy decision and on the UK inflation report. The BoE is largely expected to raise rates by 25 basis points to 0.50%. Markets will keep a close eye at growth and inflation projections in the inflation report, looking for clues on additional rate hikes next year. Carney and Co will keep this option open. However, we doubt that there is room for a further rate hike anytime soon as long as the uncertainty on Brexit persists. In this context, we assume that there is a lot of good news discounted for sterling of late.
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. This rebound did run into resistance. EUR/GBP tried to regain the 0.890.90 area, but there were no follow-through gains. The drop below the 0.8855 area (neckline minor double top) on Friday opened the way for a return to 0.8743 or even 0.8652 supports. The jury is still out, but we maintain the working hypotheses that this area will be tough to break in a sustainable way
EUR/GBP: testing first important support at 0.8743 ahead of the BoE decision
