Sunrise Market Commentary

• Fed expected to cut rates to 2.00 %
  US bond markets clearly underperformed their European counterparts going into the Fed meeting. The Fed is expected to cut rates by 25 basis points, but might shift into a wait-and-see approach even if the risks for the economy remain to the downside.
• European bonds rebound on weaker eco data and milder inflation figures
  Yesterday, the European yield curve steepened further, as bond sentiment improved. This is consistent with our fundamental view too and as such long positions may again be considered, especially at the short end of the curve. Today, the risk is again on the downside for both the EU Commission confidence indicators as well as the euro zone flash CPI.
• FX : Dollar holds up well, sterling hit by poor UK data
  EUR/USD drifted lower yesterday as poor EU data dented euro sentiment. Weak UK data also blocked the sterling rebound. More bad news for the euro zone and the Fed paving the way for a prolonged pause in its easing campaign might cause additional repositioning on the currency markets.

The Sunrise Headlines

• US stock market indices close the session little changed to slightly lower.
• Japanese industrial production fell sharply in March while household spending was weak, too.
• BOJ keeps rates unchanged at 0.50 %
• Oil drops to USD 115 p/barrel
• Citigroup offers to sell USD 3 billion of stock to raise capital
• Gold drops to 3-month low as dollar rebounds
• US GDP release and Fed interest rate decision are the key drivers for markets today. EU data (Flash CPI and confidence indicators) deserve some attention, too

Currencies: Dollar Holds Up Well, Sterling Faces Headwinds Again

On Tuesday, EUR/USD showed some intraday swings, but at the end of the day the dollar preserved the gains of the previous sessions quite easily. At the start in Europe, EUR/USD drifted lower and the European data justified this euro weakness. In line with German inflation published on Monday, the Spanish CPI (and to a lesser extent also the Belgian CPI) confirmed that European inflation might be at/close to its peak. On top of that, a series of data from the retail sector pointed to a rather steep decline in consumer spending in the euro zone area and together with the recent deterioration in business sentiment this points to a potential sharp deterioration in growth in the euro-zone area. This is of course no good news for the single currency.

At the start of US trading, the euro tried to fight back and temporary returned above the 1.56 barrier. However, EUR/USD trading was still dominated by a sell-on-upticks sentiment and the dollar remained in the drivers' seat. The euro losing interest rate support against the dollar supported such a move. EUR/USD closed the day at 1.5573 compared to a 1.5658 close on Monday.

Today, the European calendar contains the European flash CPI estimate and the EU commission sentiment indicators while in the US the ADP labour market report and the advance release of the Q1 GDP are scheduled. After the close of the European market the Fed will publish its interest rate decision.

Of course, the Fed interest rate decision and statement will take center stage. However, in the current environment we also keep an eye on the European data. A combination of weaker European activity data and more signs that European inflation might be over its peak might give less credence to the hawkish ECB rhetoric of late and this could also weigh on the euro. In the US the ADP labour market report and the GDP are important and interesting (for example a negative US growth figure could create quite some high profile headlines). However, one might expect any market reaction to these data to remain guarded ahead of the Fed decision.

We expect the Fed to cut rates by 25 basis points and the statement probably will continue to warn for downside risks to the US economy. At the same time the Fed will probably signal at least a prolonged pause in its easing campaign as the combination of previous interest rate cuts and technical measures to address the liquidity problems should get time to do their job in the months to come. As such, this outcome should not be that much of a surprise for markets. However, investors feeling that the end of the US rate cut cycle might be over while things in Europe are moving in the other direction could leave further traces on the currency markets.

Until Mid last week the pressure in EUR/USD was clearly to the upside with the pair still setting new (minor) highs early last week. However, a clear break above the previous highs didn't occur and a poor German IFO-release pulled the trigger for a correction.

We have/had a long-standing dollar negative view and don't change that attitude in a longer term perspective. For this we need indications that the US economy is able to overcome the negative impact from the credit crisis in a sustainable way. It probably takes (much) more time to get that perspective. However, short-term there is a window of opportunity for a consolidation/correction in EUR/USD and today's events might open that window further. European data could reopen the debate on ECB rate cuts further out while in the US the arrow tends to point in the opposite direction.

Recently, we advocated that a swift break above 1.60 would not be that easy and the rejection of this key area last week made us more confident that the topside in this pair has become better protected and that some consolidation/correction might be in store. This view is confirmed by some short-term technical indicators. 1.5510 (previous low) remains our first point of reference. Medium term, the 1.5340 (March correction low) is the key level to watch out for.

EUR/USD: euro continues to drift lower

Support stands at 1.5540/20 (ST low/Boll Bottom), at 1.5510 (03 April low), at 1.5456/43 (Equality Cwave/ weekly envelope) and at 1.5341 (24 Mars low).

Resistance is seen at 1.5610/20 (Daily envelope/STMA), 1.5692 (ST high), 1.5710/18 (Neckline ST double top/Broken LTMA), at 1.5768/82 (Boll Midline/MTMA), at 1.5856 ( Broken uptrend line).

The pair is in oversold territory.

USD/JPY

On Tuesday, USD/JPY came under pressure early in US trading as stock markets opened in the red and as US eco data (House prices and consumer confidence) failed to convince dollar buyers. However, the correction was short-lived and as soon as equities bottomed, USD/JPY recaptured most of the earlier losses. The pair closed at 104.01 compared to a 104.19 close on Monday.

This morning, Japanese eco data (industrial production and consumer spending) came out materially below market expectations, confirming a further loss of momentum in the Japanese economy. However, as usual this only had limited impact on yen trading. The BOJ as expected left rates unchanged at 0.50%. Later today, the Bank may lower its growth projection. Japanese stocks trade slightly in the red at the moment of writing and this causes some minor yen gains compared to the close yesterday evening.

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 (second target at 106.31) and the break above 102.95 (reaction high) improved the short-term picture further. Stock market sentiment will continue to be the main driver in this pair. As long as the stock market sentiment remains constructive and as long as corrections remain limited, the downside in USD/JPY apparently remains well protected. The 102.95/65 area (previous high/correction low) is the first area of defence 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-on-dips approach in this pair, but the upside obviously becomes more difficult short-term with some important resistance looming and stock market entering calmer waters after the recent rebound.

USD/JPY: Rebound shifts into a lower gear.

Support stands at 103.62/55 (daily envelope/break-up), at 103.31 (uptrend line), at 103.22/17 (ST low/Weekly envelope + MTMA), at 102.65 (Last week low) and at 101.92 (Break-up).

Resistance comes in at 104.36 (Reaction high), at 104.69 (Daily envelope + reaction high), at 104.82/85/95 (Reaction high/Boll top/Previous reaction low), at 105.21/23 (50% retracement/ weekly Boll Midline) at 106.31/38 (2nd target double top 101.04/ Weekly envelope).

The pair trades in overbought conditions.

EUR/GBP

On Tuesday EUR/GBP trading showed two faces. In early trading EUR/GBP joined the global decline in EUR/USD, but later in the session (and also overnight) a series of poor UK eco data hammered sterling sentiment. UK mortgage approvals confirmed the difficult situation in the UK housing sector while a poor CBI distribute trades report added the growing evidence that the consumer is coming under pressure, too. So, while EUR/USD continued to drift south, EUR/GBP changed course and closed the session at 0.7906, compared to 0.7863 on Monday. Consumer confidence (published overnight) dropping to a 16 year low only adds to the sterling negative sentiment this morning.

Today, the UK calendar contains nationwide house prices.

10 days ago, 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 even for a correction. However, the price action yesterday and overnight only illustrates that any sustained rebound in sterling will be an uphill battle as it may at any time be undermined by poor UK eco data. In this respect, further downside in EUR/GBP, if any, will probably be a sign of euro weakness rather sterling strength. The easiest part of the sterling rebound may be already behind us.

EUR/GBP: sterling rebound runs into resistance

Support comes in at 0.7894 (Broken STMA), at 0.7865 (Break-up), at 0.7840/30 (Daily envelope, Reaction low), at 0.7822 (April 03 low, at 0.7787 (Weekly envelope) and at 0.7746 (24 March low).

Resistance stands at 0.7932 (38% retracement), at 0.7953 (Reaction high), at 0.7969/76 (MTMA + Weekly envelop) at 0.7993 (ST break-down) and at 0.8040 (Broken uptrend line).

The pair is again in neutral territory.

News

US: Consumer confidence declines further

US consumer confidence as measured by the conference board dropped to 62.3 in April from an (upward revised) 65.9 in March. The present situation index again showed a steep decline from 90.6 to 80.7. The expectations index improved slightly from 49.4 to 50.1. Lacklustre business and job conditions but also rising gasoline prices cause consumers to make a more negative assessment on the economy.

EMU: Spanish and Belgian CPI confirm lower German inflation data

Following the downward surprise in the German inflation data, the Spanish and Belgian CPI declined too in April. In Spain, the headline inflation rate fell from 4.6% Y/Y in March to 4.2% in April and in Belgium from 4.39% to 4.15%. All together, these inflation data suggest that today's flash CPI may come out at 3.3% or even 3.2% from 3.6% last month.

Other: UK CBI distributive trades report collapses

In the UK, the CBI distributive trades report showed that a balance of 26% of the retailers said that volumes were down compared to a year ago, the weakest since November 2005 and compared to an expected 3%. Also next month sales are expected to fall. The CBI attributed part of the weakness due to the timing of Easter, which fell in April last year, and to the wet weather compared to last year. Looking at the sector in detail, household goods reported the weakest sales balance, which suggests that the downturn in the housing market is having an effect on consumer spending. In this context, the fall in the mortgage approvals to a record low at 64K and the slowing in net lending secured on dwellings in March does not bode well for the outlook for consumer spending and for the UK economy in general.

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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.