Sunrise Market Commentary

• US Treasuries start the week with quiet session.
  In absence of eco news, Treasuries hovered mostly sideways digesting last week's losses, driven intra-day by the equity gyrations. The calendar remains a little light today, suggesting that equities will remain the driving force. Overall, more sideways trading is likely today.
• ECB increasingly concerned about inflation developments
  Despite yesterday's slight gains, the technical picture is still downwardly oriented following last week's break lower. This has put our main scenario for three ECB rate cuts this year into question. As such, we are still sidelined for now and await this week's business confidence surveys before altering our fundamental view.
• FX: BOE liquidity measures no help for sterling
  Sterling has to give back most of last week's gains as markets are disappointed on the BOE plan to address the liquidity problems in the UK banking sector. EUR/USD remains well bid, supported by ongoing hawkish ECB talk.

The Sunrise Headlines

• US equities end narrowly mixed (S&P/Dow lose about 0.2%, NASDAQ gains 0.2%) with energy and IT gaining, while financials and utilities lose ground
• Bank of America (-2.5%) reported Q1 earnings sharply down on bad loans and warned the housing crisis is to spread further. National City cut its dividend sharply and will raise more capital to offset losses.
• Citigroup sold 6 billion USD of hybrid securities to bolster its balance; JPMorgan sold 2. billion USD senior debt and Merrill plans a tier 1 issue.
• RBS might announce details of Europe's biggest ever rights issue soon.
• ECB Mersch says the ECB should consider higher rates, according to newspaper.
• BoE mortgage plan is published, but the conditions are quite restrictive (high fee and haircuts), leading to some disappointment in the market.
• Oil is trading little changed after setting another record high (117.83 $) yesterday. Other commodities traded mostly sideways.
• Thin calendar with US Existing Home sales and the BoC rate decisions highlights.

Currencies: BoE Measures No Help For Sterling

On Monday, there were not many traces left from the cautious dollar optimism that became visible on Friday. Last week, global market sentiment improved and stocks recorded some buoyant gains on hopes that the worst of the credit crisis might be over. This helped the dollar to some gains. However, the euphoria faded at the start of this trading week (disappointing BoA results weighed on sentiment) and the dollar had to give back most of the recent 'gains'. Ongoing hawkish ECB talk (ECB's Liebscher warned on indications of second round inflation effects) limits the downside in EUR/USD. The pair showed a gradual but steady rebound and tested offers in the 1.5950 area at start of USD trading and closed the session at 1.5912, compared to a 1.5817 close on Friday evening. So, the highs and the psychological level of 1.60 are again on the radar.

Today, the US calendar contains the Existing Home Sales and the Richmond Fed Manufacturing, but both should have only intraday significance.

Over the previous weeks and even more last week, the pressure in EUR/USD was to the upside with the pair setting new minor highs last week. However, a sustained break didn't occur yet. Easing credit woes last week helped to slow the decline of the dollar, but ongoing hawkish ECB talk continues to give EUR/USD strong downside protection. This was once again illustrated yesterday. We have a long-standing dollar negative view and we don't see any fundamental or technical sign to become dollar positive at this stage. Nevertheless, even after yesterday's rebound, we still have the impression that the decline of the dollar is slowing and that a swift and forceful break above the 1.60 barrier won't be that easy. For this to happen, some high profile negative US credit or eco news is needed. With the US calendar very thin this week, this kind of high profile news probably won't be available. So, in a day-to-day perspective, we expect more consolidation with barrier hunting towards the 1.60 still a decent possibility.

Looking at the graphs, last week's price action didn't change the long-term technical picture. The MTMA (1.5817 today) came under sever pressure a few times but wasn't broken in a sustainable way. Further out 1.5510 remains the first important barrier to call off the USD alert. On the upside, the break above the previous top at 1.5915 is still not fully confirmed. This leaves the short-term technical picture quite indecisive for now.

EUR/USD: again close to the highs.

Support stands at 1.5817/14 (MTMA/daily envelop), at 1.5790 (ST low/Boll Midline), at 1.5710 (Reaction low), 1.5670/67 (last week low/LTMA), at 1.5633 (weekly envelope) and at 1.5510 (Reaction low).

Resistance is seen at 1.5962 (Daily Boll top), at 1.5985 (New high), at 1.6000 (1st target channel Break), at 1.6038 (Weekly envelope + Irr B) at 1.6061 (Second Irr B). .

The pair is in overbought conditions.

USD/JPY

Yesterday, the less buoyant sentiment on global stock markets also capped the rebound of USD/JPY. USD/JPY started the week in the 104 area but drifted gradually lower throughout yesterday's session and this move even was extended this morning with the pair testing bids in the 102.80 area this morning. After a strong performance last week, also Japanese stocks fall victim of some profit taking this morning, but after all the correction is limited compared to the recent gains. If this pattern of constructive stock market sentiment persists, the correction in USD/JPY probably also doesn't have to go that far either.

Recently, the downside in USD/JPY became better protected. The break above the 101.04 level painted a short-term double bottom pattern on the charts and Friday's break above 102.85/95 improved the short-term picture further. This area was retested this morning, but no re-break occurred. Stock market sentiment will continue to be the main driver in this pair. In this respect, we continue to take a close look at the US S&P 500, which comes close to key resistance levels (1406 area). Nevertheless, as long as the stock market sentiment remains constructive and as long as corrections remain limited, the downside in USD/JPY probably remains rather well protected. The 102.80 area (previous high) is the first area of defence with 102.16 (MTMA) to hold to keep the short-term constructive momentum intact. 104.95 (Previous reaction low) becomes the next key resistance area. We hold on to our buy-ondips approach in this pair.

USD/JPY: correction, but picture still constructive

Support stands at 102.83/71 (STMA/ Break-up), at 103.40 (Break-up hourly), at 102.36/23 (Weekly envelop/ reaction low) and at 102.16 (MTMA) and at 101.85/60(Reaction low/Boll Midline).

Resistance comes in at 103.60 (Reaction high), at 104.06 (reaction high), at 104.18/28 (Boll top/Daily envelope), at 104.64/95 (Last week high/ previous reaction low) and at 105.04 (Broken uptrend line).

The pair moves into overbought conditions.

EUR/GBP

On Monday, also the sentiment on sterling again deteriorated quite sharply. At the end of last week, for the first time since long, EUR/GBP dropped below a long standing uptrend line. This coincided with improving global market sentiment and hopes for a BOE plan to support liquidity in the UK money market. This plan indeed was published yesterday morning. The plan put in place a facility to swap high-rated mortgage back security for government bonds to be used in regular repo operations. However, the conditions for the swap were stricter than some in the market had hoped for and this obviously weighed on the sterling yesterday. On to of that, the comeback in EUR/USD only accelerated the rebound in EUR/GBP. So, the sterling gains seen at the end of last week evaporated and EUR/GBP again closed the day above the psychological barrier of 0.80. One can only see this as a disappointing performance from a sterling point of view.

Today, the UK and EMU calendar are almost empty. So price action in EUR/GBP is again at the mercy of global market sentiment and the EUR/USD price action.

At the end of last week, we picked up the technical signal of EUR/GBP dropping below a medium term uptrend line and saw this as a window of opportunity for sterling to enter calmer waters and maybe even for somewhat of bigger correction. In this respect, we advocated to take profit on EUR/GBP longs and hoped to get an opportunity to set up new longs at lower levels e.g. around the technical support area in the 0.7745 (reaction low)/0.7690 area (previous high). However, the market reaction on the back of the BOE measures obviously doesn't match our hope for some sterling positive correction. As long as the highs are not taken out in a sustainable way, our call for sterling to enter calmer waters is still valuable though. We still have a standing negative view on sterling due to the underlying fundementals, but we are a bit wrong-footed on the swift rebound in EUR/GBP after last week's technical sign.

EUR/GBP: BOE measures not enough to support sterling

Support comes in at 0.8008 (Broken STMA), at 0.79.92/90 (Break-up hourly/MTMA), at 0.7960/57 (Daily envelope/Boll Midline), at 0.7896 (Yesterday low) and at 0.7873/66 (Reaction low/LTMA).

Resistance stands at 0.8044 (ST high), at 0.8066/67 (Daily envelope/ break-down hourly), at 0.8091/98 (Boll Top/ Reaction high) and at 0.8151 (Irr B).

The pair is in neutral territory.

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Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.