Sunrise Market Commentary

• US Treasuries keep up rather well in the face of rebounding equities
  Treasuries fell only moderately, despite sharp rebound in equities, but picture remains unchanged. We suspect that also today equities and oil will guide trading, but the ADP employment report and refunding announcement needs to be monitored for surprises.
• Bund moves above 111.54 resistance despite equities
  The Bund moved above key resistance and stayed there despite rebounding equities. However, a sustained break is needed before the horizon is cleared and only by the end of the week, the picture may be clear.
• FX dollar extends gains on further decline in oil price
  The dollar recorded some nice gains against the yen and even more against the euro. Oil was (and remains) the most important driver for the US currency. However, today and later this week the eco data might gain influence.

The Sunrise Headlines

• US equities jump (Dow/S&P 2.3% up), regaining earlier losses as oil prices fall to its lowest levels in almost three years; Asian stocks trade higher.
• WTO talks, aimed at producing a global trade agreement, collapsed in its ninth day on sharp divisions between the US, India and China about access to agricultural markets in the developing world.
• Japan's industrial production falls 2% in June on slowing exports, raising fairs that the Japanese expansion may be over.
• Securities regulators in the US have extended the emergency rule aimed at curbing abusive short selling in the stocks of 19 major financial firms.
• Oil prices ($121.90) extended their fall, reaching its lowest level in almost three months as US oil stock data are expected to show a rise in inventories and slowing demand.
• Today the EU commission confidence indicators (July) and the July ADP employment report on the calendar.

Currencies: FX Dollar Extends Gains On Further Decline In Oil Price

On Tuesday, EUR/USD started trading in the 1.5750 area during the morning session in Europe, it looked as if it was going to stay their for the rest of the day, maintained a very tight sideways trading range. However, yesterday we already signaled that the dollar losses against the euro were limited given the uncertainty seen in other markets on Monday evening and yesterday morning. The US currency received a better bid as soon as US traders stepped in and EUR/USD breaking below Monday's low (1.5684 area) triggered an acceleration of the move. At the same time, the decline in the oil price was also a strong supportive factor for the US currency and even the US consumer confidence release (while only marginally better than expected) added to the USD positive momentum. EUR/USD tumbled to the 1.5555 area later in US trading and closed the day at 1.5588, a decent gain of the USD compared to the 1.5741 close on Monday. EUR/USD now also trades below the important 1.5611 support.

Today, the calendar contains the EU confidence data. In the US, investors look out for the ADP labour market report. One can assume the European data to confirm the deterioration of the economic conditions in the euro area. On the ADP we don't have a strong view.

Recently, we favored a scenario of no break of the topside of the sideways trading range that already guides EUR/USD trading for several months as we expected European eco data to show growing signs of weakness too. On top of that, the recent decline in oil prices also gave the dollar strong additional downside protection against the euro (and against most other major currencies). Oil obviously remains the most important single driver for the dollar short-term. The first US contract currently tests the early June lows (USD 120/121 p/barrel area) and this is a first key support level on the charts. A sustained brake below this level would almost certainly have an additional positive impact on the USD, too. Recently, (US and European) eco data only had a limited impact on EUR/USD trading, but the key US data that will be published over the next two days probably won't pass unnoticed in case of a sharp deviation from consensus. Today's ADP will be a first pointer.

EUR/USD: below the 1.5611 neckline

Support stands at 1.5568/53 (LT channel bottom/ST low + Boll bottom), at 1.5528/24 (Daily envelope/2nd target double top), at 1.5488/63 (Target channel break/76% retracement), at 1.5454 (1st tgt 1.5611) and at 1.5313 (2nd tgt 1.5313).

Resistance is seen at 1.5648 (Daily envelope), at 1.5660 (STMA), at 1.5682 (Break-down hourly), at 1.5768/73 (Week high/MTMA).

The pair is moving into oversold territory.

USD/JPY

Looking at the charts, EUR/USD last week moved away from the all-time highs above 1.60. In this move, the pair dropped below a short-term uptrend line and painted a first short-term double top pattern (neckline1.5782). Yesterday, the pair also dropped below a next important support at 1.5611, potentially putting a bigger double top formation in place. If confirmed this would make the picture more EUR/USD negative/dollar positive medium term. Recently we had a sell-on-up-ticks approach EUR/USD and hold on to this tactics. The target of the channel break comes in at 1.5488. The last target of the double top with neckline at 1.5611 would even bring EUR/USD below the borders of the longstanding trading range at 1.5285. Such a break would be a major signal. Of course, we're not that far yet. For now, we only assume a scenario of EUR/USD moving further south within the established 1.5285/1.6040 trading range.

On Monday, USD/JPY joined the broader USD rebound. Contrary to USD/EUR, USD/JPY already started a gradual uptrend in the morning in Europe, probably as the reaction on the European stock markets was not as bad as one could have feared after the sell-off on Monday in the US. Later, the decline in the oil price also triggered an additional intraday upleg in USD/JPY. The pair closed the session at 108.11, compared to 107.46 on Monday. However, the gains of the dollar against the yen were less pronounced compared to the euro and this resulted in EUR/JPY moving (slightly) lower, below the 169 mark.

This morning, Japanese industrial production data were (slightly) weaker than expected coming in at -2.0% M/M (June). Japanese (and Asian) stocks build on the positive momentum in the US yesterday evening. However, at least for now this doesn't cause additional USD/JPY gains.

Looking at the charts, USD/JPY (and EUR/JPY) temporary dropped below first important support levels (USD/JPY 104.99; EUR/JPY 166.09) two weeks ago. However, this signal was soon reversed and USD/JPY is now again moving towards the topside of the established sideways trading range (cf. graph). Oil also remains the single most important driver for this pair. The global stock market performance still might have some impact, but its influence obviously is less compared to what was the case some time ago. Recently, we had a neutral view on USD/JPY. Over the previous sessions, the pair tried to regain a first important resistance (107.75/108.08 area) and this test is still ongoing. A sustained break above this area (= neckline double bottom) would improve the ST technical picture in this pair. However, key technical resistance levels are still lining up (further out 108.58/62 is the next high profile barrier. cf. graph). Even will the ST momentum in this pair is obviously improving, we remain neutral on USD/JPY as long as the 103.77/108.58 range holds. Also take a close look at EUR/JPY. A decline in this cross rate could also hamper the topside in this pair short-term.

USD/JPY: (gradually) moving towards the range top.

Support stands at 107.73/65 (STMA/Daily envelope), at 107.27/11 (ST low/Break-up), at 106.87 (Boll Midline/MTMA), at 106.56/46 (Reaction low/weekly envelope), at 106.03 (Last Week low), at 105.95/84 (MT reaction low/MT break-up).

Resistance comes in at 108.30 (Week high), at 108.43 (25 June high) at 108.58/62/66 (Range top + Boll top) at 108.82 (Weekly envelope) and at 109.95 (50 % retracement).

The pair is in overbought territory.

EUR/GBP

On Tuesday, EUR/GBP initially held a rather tight range in the 0.7890/0.7900 area and even set an intraday high around 0.7912 after a very poor UK CBI distributive trades report. However, later in the session, the rather sharp decline in EUR/USD also left its traces on EUR/GBP trading and the pair in step moved lower to close the session at 0.7878, compared to 0.7894 on Monday.

Today, the UK calendar is empty.

Since mid April, EUR/GBP developed a very uninspiring consolidation pattern (0.7766/0.8098). Several attempts to move higher ran into resistance. Last week's sharp correction on the BoE Minutes brought the pair close to a first important support level. However, also this test was rejected, leaving the short-term sideways trading range unharmed. From a fundamental perspective, we hold on to our sterling skeptic attitude. However, the decline in euro seen over the previous week also tends to have some impact on EUR/GBP and in this respect a close look at the technical picture is warranted. 0.7831 remains the first point of reference and a after a long period of sideways trading in a tight range, a rupture of this range contains the risk of additional losses. A sustained break below the 0.7766 barrier would change the long-term picture in a profound way and would make us question our established sterling negative attitude.

EUR/GBP: coming closer to first important support

Support comes in at 0.7862/50 (Reaction lows), at 0.7846/44 (Daily Envelope/ Boll bottom), at 0.7839/31 (Last week low/MT reaction low) and at 0.7766 (Reaction low).

Resistance stands at 0.7882 (STMA), at 0.7894/08 (Break-down/Daily envelope + MTMA), 0.7924 (Boll Midline), at 0.7933 (ST high), at 0.7945 (Weekly envelope) and at 0.7974 (21 July high).

The pair is slightly oversold.

News

US: Consumer confidence stays at record lows

The S&P Case Shiller house price index fell 15.78% Y/Y in May after a revised 15.22% Y/Y decline in April, slightly better than expected (-16% Y/Y). The month-onmonth decline was smaller than in the previous month which might have been due to spring selling season in full swing. The 3-months annualized figure improved from - 25% in March and -21.75% in April to -15.91% in May, this could indicate that some first signs of stabilization are around the corner. However, it is too soon to deduct the housing market is turning the corner. Credit availability, higher mortgage rates and weakness in the labour market and income all continue to weigh on demand for housing.

The consumer confidence index barely rebounded in July, coming out at 51.9 after an upwardly revised 51.0 in June. The present situation was broadly unchanged (65.3 from 65.4) while expectations showed a slight improvement (43.0 from 41.4). Labour market conditions worsened further in July and the consumers' inflation forecast for the next 12 months fell slightly to 7.6% in July from a prior reading of 7.7%. Although these data were marginally better than expected, there is no reason to be optimistic as consumer sentiment stays at historical low levels and labour market conditions are worsening.

EMU: French housing market weakens

In France, consumer confidence fell from -46 in June to -48 in July. Both current and future standard of living indices decreased, but more important was the deterioration in future unemployment (35 from 20). Consumer confidence is further weakening due to accelerating inflation which erodes households' purchasing power. The weakening in the housing market also continues with housing starts 3M average falling 28.2% Y/Y in June and housing permits 3M falling a more modest 15.3% Y/Y.

German CPI (EU harmonized) stayed unchanged at 3.4% Y/Y in July, which is in line with the expectations, but some were hoping for a slight decline. This indicates that high energy prices are still keeping inflationary pressures elevated and euro zone CPI is expected to stay around 4.0% Y/Y.

Other: UK economy deteriorates rapidly

In the UK, mortgage approvals fell to 36 000 in June, while the weak May figure was downwardly revised from 42 000 to 41 000. This confirms the downward trend in the housing market that was already shown by falling house prices earlier this week. Net consumer credit came out in line with the expectations falling from a revised 1.3B in May to 0.9B in June and net lending secured on dwellings continued its downward trend, falling sharply from 3.8B to 3.1B.

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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.