Sunrise Market Commentary
- Rates: Risk sentiment key for trading
European stock markets remain fragile with the German Dax extensively testing first support yesterday. Asian sentiment suggests a risk rebound after a 7-day sell-off, but we are suspicious about the sustainability of such move (bull trap?). With normal correlations back in place, a risk rally could be slightly negative for core bonds today. - Currencies: Euro finally running into resistance?
The EUR/USD rally made an intraday U-turn yesterday. The jury is still out, but the technical picture of EUR/USD and EUR/GBP show tentative signs of a ST topping out process. The dollar (and sterling) might get some additional support if risk sentiment improves.
The Sunrise Headlines
- US stock markets closed around 0.5% lower, failing to really recover from opening weakness. Overnight, Asian risk sentiment improved with most indices gaining ground and Japan outperforming (+1%).
- Australia’s jobless rate unexpectedly fell to 5.4% in October as fewer people sought work. Employment grew less than expected (+3.7K), but was driven by full-time positions (+24.3k) which boosted hiring this year.
- China’s financial sector faces bubble risks, a government official warned and said a property tax may be on the cards in the near future as authorities extended their efforts to reduce a worrisome build-up of debt in the economy.
- The Republican effort to revamp the US tax code hit turbulence as two senators expressed misgivings over a bill hastily rewritten by leaders trying to placate rebellious moderates and conservatives.
- Merkel’s running out of time to form a government. With her self-imposed end-of-week deadline to unlock coalition talks approaching, she’ll meet heads of her potential “Jamaica” coalition to decide if a deal is possible
- Slovakia’s government needs to take additional consolidation measures to meet its balanced budget goal in 2020 and risks overshooting goals in future years, the country’s fiscal watchdog said.
- Today’s eco calendar contains US weekly jobless claims, Philly Fed business outlook, industrial production and EMU CPI (final). More central bankers are scheduled to speak and Spain & France tap the bond market
Currencies: Euro Finally Running Into Resistance?
EUR/USD rally stalls ahead of key 1.1880 resistance
USD trading showed two faces yesterday. The euro rally/USD sell-off continued in Europe and early in US dealings. EUR/USD (temporary) cleared the 1.1837 post-ECB top. US retail sales and CPI were marginally better than expected. Initially it didn’t help the dollar, but the USD sell-off gradually slowed. US equities bottoming out after an initial dip maybe helped to slow USD selling. EUR/USD reversed the earlier gains and closed the session at 1.1791 (from 1.1789). USD/JPY finished the day at 112.88 (from 113.46).
Asian risk sentiment improved this morning as the correction of the previous days lost momentum. Most regional indices show moderate gains with Japan outperforming. USD/JPY tries to regain the 113 mark. EUR/USD (1.1790 area) is little changed from yesterday’s close. Australian labour market data were mixed. The unemployment rate declined further to 5.4% from 5.5%, but job growth disappointed. Still, AUD/USD rebounded to the 0.76 area, despite the overall comeback of the dollar.
The European and US eco calendars are modestly interesting today. In Europe, the final EMU October CPI is expected to be confirmed at 0.1% M/M and 1.4% Y/Y. (core unchanged at 0.9% Y/Y). The report probably won’t be a market mover, but in theory it is no support for the euro. In the US, the jobless claims, the Philly Fed business outlook and the October production data will be published. Claims are expected to decline slightly to 235K. The Philly Fed outlook is expected to decline from 27.9 to 24.6, but remains at a healthy level. Production is expect to rise a decent 0.5% M/M. Today’s US eco data are not the most important ones, but the intraday price swings to the data might be an indication whether dollar sentiment improves after the recent setback. We also look out whether the equity correction slows down. Of late, the dollar was often more sensitive to risk-off sentiment than the euro. The debate on the US tax bill remains a source of uncertainty. Earlier this week we had a cautious bias on the dollar. We considered the decline exaggerated given the data and the developments on other markets, but we didn’t fight the ST negative USD momentum. The jury is still out, but yesterday’s intraday price action suggests that the USD decline (EUR/USD rally) might be losing momentum. If confirmed, cautious EUR/USD sell-on-upticks can be reconsidered
From a technical point of view, EUR/USD set a new post-ECB low on Tuesday last week, but the move petered out. EUR/USD this week regained intermediate resistance at 1.1690/1.1837, but the 1.1880 MT correction top was left intact. A break above the latter would suggest a full retracement to the 1.2092 correction top. We don’t preposition for such a scenario yet unless there comes real negative news from the US. Yesterday’s intraday price action suggests that a ST trend reversal might develop. We look out whether the 1.1861/1.1880 resistance can do the job. USD/JPY’s momentum was positive in past months. The pair regained 110.67/95 resistance and tested the 114.49 MT range top. The attempt failed. A sustained break would improve the technical picture. However; last week’s price action was unconvincing despite a solid interest rate support. The pair yesterday dropped temporary below the 112.96 support, but the test is ongoing. We see no sign yet of a sustained USD/JPY rebound
EUR/USD: rebound stalls ahead of 1.1880 resistance. Tentative signs of a ST trend reversal
EUR/GBP
EUR/GBP running into resistance?
The UK labour market data showed a mixed picture yesterday. Wage growth (2.2% Y/Y) was marginally higher than expected, but remains low. The unemployment rate was stable as expected at 4.3%. Employment growth unexpectedly declined. Sterling lost some further ground after the publication of the data. EUR/GBP jumped temporary north of 0.90, but the gain could not be sustained. Later in the session, the EUR/USD correction also dragged EUR/GBP back south. The pair even closed the session at 0.8952 (from 0.8961). Cable maintained the recent consolidation pattern and finished at 1.3171.
October UK retail sales are expected little changed (0.2% M/M and -0.5% Y/Y) after a substantial setback in September. Monthly swings were quite big recently. The bar of the consensus estimate isn’t too high. In addition, we have the impression that eco data have to be really weak for sustained further sterling losses at this stage. Sterling is in some kind of wait-and-see modus awaiting more clear signs from UK politics and from the progress in the Brexit negotiations. Markets will also continue to keep an eye at the debate on the ‘EU Withdrawal Bill’ in the UK Parliament. We had a EUR/GBP positive bias short-term. We have the impression that the upside momentum is easing. A break above the 0.9015/33 area might not be that easy shortterm. This would especially be the case if the EUR/USD rally slows. We take a more neutral approach short-term.
MT technical: Sterling rebounded in September as the BoE prepared markets for a rate hike. This rebound ran into resistance as markets anticipated that any rate hikes would be very gradual and limited. This view was confirmed at this month’s BoE policy meeting. EUR/GBP currently trades in a 0.8733/0.9033 consolidation range. A downside test of this range was rejected. We assume that the 0.8733-0.8652 support will be tough to break. We change our short-term bias from buy-on-dips to neutral as the pair came close to the 0.9033 ST range top and as this test was rejected yesterday.
EUR/GBP nears MT range top. Time for the rebound to take a breather?
