Sunrise Market Commentary
- Rates: Positive intraday bias US Treasuries
The end of the US supply operation and end-of-month buying are technical elements that could prove positive for US Treasuries in an intraday perspective ahead of the weekend. Risk sentiment on stock markets is a wildcard. If yesterday’s correction persists, it’s an additional positive for US Treasuries. Eco data include US Q2 core PCE and German CPI. - Currencies: EUR/USD rally took a breather, but upside test ongoing
The dollar sell-off slowed yesterday. However, the overall technical picture remains very fragile. Global eco data probably won’t give a strong enough signal to safe the dollar today. A pick-up in volatility is often supportive for the USD (ex USD/JPY ), but we are not convinced that the dollar will be able to take up its safe haven role today
The Sunrise Headlines
- Asian stocks declined as disappointing earnings from Amazon weighed on sentiment that had already been dented by Thursday’s sudden selloff in US technology shares (Nasdaq -0.63%).
- The US Senate voted down the latest plan, the ‘skinny heath care plan’, this morning as three Republicans broke rank and voted with a unified Democratic caucus against the last proposal. Majority leader said it is now time to move on.
- Japan’s jobless rate declined from 3.1% to 2.8% in June (consensus 3.0%). Despite the tightening labour market, the CPI’s stabilised in June. The headline figure was 0.4% Y/Y (as expected) and the core was 0.0% Y/Y.
- Japanese retail sales rose a weaker than expected 0.2% M/M and 2.1% Y/Y, while household spending exceeded expectations, rising 2.3% Y/Y in June from -0.1% Y/Y previously.
- The US Senate gave final approval to legislation strengthening sanctions on Russia, North Korea and Iran and giving Congress the power to block President Trump from lifting them, setting up a possible clash with the White House.
- US Republican lawmakers have set aside the plans for a controversial border-adjusted tax in hopes of smoothing the way for comprehensive tax overhaul.
- Today’s eco-calendar for the US contains the first Q2 GDP & PCE deflators, the Employment Cost Index and the July Michigan sentiment index (final). In Europe, focus will be on the July EMU economic confidence indicator, French/Spanish GDP and the German CPI inflation.
Currencies: EUR/USD Rally Took A Breather, But Upside Test Ongoing
Dollar sell-off slows, but jury is still out
The decline of the dollar slowed yesterday. US data painted a mixed picture and gave no guidance. USD/EUR and USD/JPY reversed a big part of Wednesday’s post-FOMC USD decline. A spike in equity volatility later in US trading pushed EUR/USD to the 111 area. The impact on EUR/USD was limited. EUR/USD closed the session at 1.1677. USD/JPY at 111.26.
Overnight, the decline in equities/rise in volatility in the US spilled over into Asian markets. Losses range from roughly 0.5% to about 2%. Japan household spending was strong and the jobless rate (2.8%) matched the multi-year lows seen earlier this year. Japanese inflation held at low levels, close to the 0% mark. There was again little direct impact on the yen. USD/JPY held up quite well given the pick-up in volatility. Remarkable, the Swiss France cedes further ground. EUR/USD doesn’t show a clear trend and trades in the 1.1680 area.
In Europe, we see mostly upside risks for the EMU activity/confidence data (see Fixed Income section). German July HICP inflation is expected to have slowed to 1.4% Y/Y (0.3% M/M) from 1.5% Y/Y. We have no reasons to distance us from consensus. In the US, Q2 GDP is expected at 2.5% Q/Qa versus a dismal 1.6% Q/Qa in Q1. We side with consensus. The PCE deflator is expected to have slowed sharply to 1.3% Q/Qa from 1.9% Q/Qa in Q1, while the core PCE deflator should have come down to 0.7% Q/Qa from 2% Q/Qa previously. The slowing inflation in Q2 is already well documented, but markets may still reel when these figures are published. EMU activity data might be slightly supportive for the euro, but the inflation data are a wild card. The focus for USD trading will be on the US GDP report. Expectations for growth look reasonable, but the decline in the price indicators remains a risk for the dollar. Given expected good EMU data and potentially low US deflators, today’s day will likely data fail to support a sustained USD rebound. Aside from the eco data, the tentative rise in volatility might be the harbinger of a more pronounced equity correction. What does this will mean for the dollar? Higher volatility is normally positive for the USD (excluding USD/JPY). However, we are convinced that the dollar will be able to fully play it’s safe haven roll in the current environment. We wouldn’t be surprise to see the euro partially taking over this role. So, we don’t preposition for a major USD comeback.
EUR/USD topside test not over yet
Over the previous two months, EUR/USD cleared several intermediate resistance levels. Yesterday it extensively tested the 1.1714/36 resistance. The level was temporary broken, but a clean break didn’t occur. A sustained break would end the long consolidation that followed the sharp decline of EUR/USD in 2014/early 2015 and change the broader picture for the dollar. EUR/USD is clearly moving into overbought territory but this is no guaranty the up-move will stop. The break still needs to be confirmed, but if the pair doesn’t return below 1.16 soon, the way to 1.20 is open. We wait for a technical sign before adding USD long exposure.
EUR/USD: top MT consolidation pattern under heavy strain
EUR/GBP
EUR/GBP fails to break below 0.89 barrier
Sterling initially performed yesterday rather well given the overall USD weakness. There was only a modest and temporary spill-over effect of the EUR/USD rally into EUR/GBP. In technical trading, EUR/GBP drifted lower in the lower in the 0.89 big figure. The CBI July retail data were stronger than expected and were temporary as slight additional sterling support. EUR/GBP dropped temporary below 0.89, but later on EUR/USD outperformed cable as volatility picked up. EUR/GBP closed the session at 0.8935. Cable finished the day at 1.3066.
Overnight, the GFK consumer confidence, the only UK indicator published today, was marginally weaker than expected at -12 from -10. It had no impact on sterling. In a short-term perspective, sterling entered a consolidation pattern (against the euro). The market largely priced out the chances of an August UK rate hike. Brexit is also temporary off the radar. Over the previous days, EUR/GBP didn’t rise much further despite the EUR/USD rally. This suggested some relative sterling strength short-term. However, a rise in overall volatility usually is sterling negative. So, we are neutral on EUR/GBP today.
From a technical point of view, EUR/GBP broke above the 0.8854/66 resistance (2017 top) to set a new correction high north of 0.89, but the rally slowed at the end of last week. A break below 0.8720 would suggest that upside momentum is easing. For now, we don’t see a trigger for a sustained rebound of sterling against the euro. We still look to buy EUR/GBP on more pronounced dips. For that to happen, EUR/GBP probably needs some help from a correction in EUR/USD
EUR/GBP: consolidation near recent top
