Sunrise Market Commentary
- Rates: Markets ignore Fed
The Fed tried to sooth markets by holding on to the blueprint of its future tightening cycle, but bond markets largely ignored this message. US yields crashed after weaker inflation readings and couldn’t recover lost ground after the Fed meeting. US yield tested or broke below support levels. A confirmed break suggests a return to pre-Trump levels. - Currencies: EUR/USD cannot take out resistance with a little help of the Fed
EUR/USD tested key resistance after weak US inflation and retail sales, but made a U-turn following the FOMC meeting, completely erasing earlier gains. Bonds gave the FOMC decisions a cool reception, suggesting that the “FOMC” turnaround was largely technical-inspired and not driven by fundamental considerations.
The Sunrise Headlines
- In line with expectations, the Fed raised its target rate to 1-1.25%. The press statement contained few surprises as the FOMC is still convinced inflation will rise. The rate projections in the dot plot stayed the same, bar the 2019 projection which was lowered marginally. The Fed also announced details of winding down its balance sheet, which will start ‘relatively soon’.
- US equities ended mixed, with Nasdaq underperforming (-0.41%). Overnight, Asian stocks slumped. Oil touched the lowest level since November, below $47/barrel, as US gasoline supplies unexpectedly rose for a second week.
- The Aussie dollar jumped above AUD/USD 0.76 after an encouraging jobs report. Employment again surged in May, led by a rebound in full-time positions, sending the jobless rate to the lowest level in more than four years.
- New Zealand’s dollar fell from near a four-month high after a report showed gross domestic product grew 0.5% Q/Q in Q1, less than the forecast of 0.7%. Y/Y growth printed at 2.5% compared to a consensus of 2.7%.
- The special counsel investigating Russia’s interference in the ’16 election is now expanding the scope of special counsel Mueller’s investigation from Trump’s associates to Trump himself, sources familiar with the inquiry reported.
- ECB Nowotny asked whether adopting an inflation range, rather than a specific target, would make more sense in a situation where price growth is low for a long time.
- The eco calendar today contains the Bank of England’s rate decision and UK retail sales. In the US, industrial production and initial jobless claims data will be released this afternoon. Spain and France tap the market.
Currencies: EUR/USD Cannot Take Out Resistance With A Little Help Of The Fed
Dollar rollercoaster ride on data and FOMC
The dollar made a rollercoaster ride yesterday. Weak US inflation and retail sales pushed the dollar lower across the board. EUR/USD shot higher from about 1.12 to about 1.13, while USD/JPY dropped from 110.30 to just below 109. The FOMC hiked rates as expected, left its rate path virtually early unchanged and announced that the start of the balance sheet run-off would be “relatively soon”. It couldn’t convince bond traders. Bonds only retraced very partially strong gains on the weak data. The dollar however made a full U-turn with EUR/USD back to 112 (close 1.1218). USD/JPY didn’t completely erase losses, closing at 109.58 from 110.07 on Tuesday. We think that technical arguments played a role in the full retracement of EUR/USD’s initial gains, as resistance could not be taken out (triggering profit taking).
Asian equities trade in negative territory overnight, but without sharp losses. Oil digests yesterday’s big inventory-related price drop. USD/JPY tested the downside early on, but reverted to opening levels soon (109.60). EUR/USD traded uneventful in Asia around 1.1220.
The US calendar is well filled today. US production is expected at 0.2% M/M in May, albeit after a strong 1% M/M in April. More attention will go to business sentiment data of NY and Philadelphia. The NY measure may be slightly higher, while there is scope for a drop in the Philly Fed index given recent very high, unsustainable (?), levels. Jobless claims and NAHB housing market sentiment may be close to unchanged, but at high levels. We don’t expect mixed data to give FX markets firm direction.
The dollar gained ground on the FOMC decision, even as US yields didn’t move much higher. EUR/USD approached key resistance at 1.1300/66, but the test failed, keeping our hypothesis that the upside of EUR/USD is capped alive. We don’t expect a sharp comeback of the dollar in the near term without distinctively better US growth and higher inflation readings. While markets decided to (largely) ignore the FOMC decision, we think they should at some point move in the Fed’s direction. Therefore we favour EUR/USD to move lower in the 1.08/1.13 range, but a trigger is currently unavailable. We remain cautious on the upside in USD/JPY ahead of Friday’s BOJ meeting. The pair might still go for a test of the 108.13 April low if equities correct lower. At least more signs of a bottoming out are needed to favour long USD/JPY longs.
Technical picture
The USD/JPY rally ran into resistance in early May. A mini sell-off pushed the pair below the previous top (112.20), making the short-term picture negative and driving the pair further down in the 108.13/114.37 range. There is no convincing sign of a U-turn yet.
Early May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and US political upheaval propelled EUR/USD north of the 1.1023 range top to a corrective top of 1.1323 early June. A higher low, higher high pattern developed, but the pair is digesting earlier gains and consolidates near the top. The Trump top/correction top at 1.1300/1.1366 is next strong resistance. USD sentiment will have be very negative to clear this hurdle. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: Failed test of 1.1300/66 resistance. Prefer to see EUR/USD moving deeper in 1.08/1.13 range, but trigger is not available
EUR/GBP
Sterling likely to remain weak
The Bank of England reconvenes today to decide on its the policy rate and the direction of future policy decisions. Earlier this week, the May UK inflation rate rose more than expected, from 2.7% to 2.9%. Meanwhile, the labour market data came in lower than expected with weekly hourly earnings (excl. bonuses) rising only 1.7% compared to a consensus forecast of 2%. On balance, UK consumers are thus losing purchasing power. The combination of the latest sterling depreciation, the evidence of the pass through of sterling to CPI, the potentially weaker economic growth and lower wage inflation suggest that inflation might by higher in the short term and potentially lower in the longer term. This lowers the chance of UK inflation overshooting the BoE target in the longer run and therefore weakens the need for the BoE to hike rates. In addition, political uncertainty remains elevated. A moderately dovish adjustment to the language and guidance is possible and would buy some time until the August meeting when the new inflation projections are available. By then, the political situation could possibly have become clearer as well.
Sterling began and ended the day yesterday at around the same level compared to the dollar (around 1.2750 for cable) and to the euro (around 0.88 EUR/GBP).
From a technical point of view, EUR/GBP broke above the 0.8774 resistance and tested the 0.8854 area (2017 top) on Friday. A real break didn’t occur. A retest of that area is possible. A break beyond would open the way to the 0.90 area. A return below the 0.8655 correction low would be an indication that the pressure on sterling is easing
EUR/GBP: first test of 2017 top rejected, but sterling remains in the defensive
