Sunrise Market Commentary
- Rates: EMU CPI and Friday’s Yellen speech negative for core bonds
Dovish Fed governor Brainard joined the recent Fed chorus, hinting at a near term rate hike. Ahead of Yellen’s speech tomorrow evening, we expect US Treasuries to remain under downward pressure. The correction lower in the Bund can continue as well, especially if EMU CPI hits the psychological 2%-mark today.
- Currencies: USD extends gains on rate hike expectations, but no USD euphoria
Yesterday, USD investors adapted positions to rising chances of a March rate hike. The USD gains were substantial, but not excessive. Both EUR/USD and USD/JPY didn’t break major technical levels. Today, some consolidation might be on the cards as there are no important data in the US. EUR/GBP is nearing a first technical resistance.
The Sunrise Headlines
- US and global equities soared, as data reinforced expectations that a Fed rate hike is imminent. Investors see that as a sign of strengthening economic growth. Asian stocks advance modestly despite a buoyant WS yesterday.
- EU states could regain control over matters ranging from regional development to consumer protection, Jean-Claude Juncker, has suggested, setting out ideas to shore up the bloc after Brexit.
- Fed governor Brainard, a dove, said that the Fed should be prepared to increase its benchmark interest rate “soon” as the job market pushes closer to full employment and inflation moves towards the central bank’s target.
- The kiwi dollar pared some of its losses after RBNZ Governor Wheeler said risks to interest rate moves are equally balanced. NZD/USD trades now around 0.7132.
- UK PM May suffered a defeat on her draft Brexit law after the Lords rebuffed a government plea to leave it intact. It voted in favour of an amendment that protects the right of EU nationals to remain living in the UK after Brexit.
- Brent oil dropped to $56/barrel from $57/barrel after EIA data showed US crude stockpiles rose to a record. Gold spot (1246.90$/ounce) recovered in US trading to snap two days of declines, but slid lower overnight on Fed Brainard.
- Today, the market calendar slows down with only EMU inflation as key economic release ECB Lautenschlaeger speaks after European closure, while France and Spain tap the markets
Currencies: USD Extends Gains On Rate Hike Expectations, But No USD Euphoria
Dollar propelled by March rate hike bets
On Wednesday, the rising probability of a March Fed rate hike propelled the dollar. The US currency (and equities) ignored that US president Trump failed to give details on his economic and fiscal plans. The US Manufacturing ISM was very strong, but at the time of the publication, the dollar had already reached the intraday highs. USD/JPY finished the session at 113.73 (from 112.77). The rise of the dollar against the euro was more modest. EUR/USD closed the day at 1.0547.
Overnight, Fed’s Brainard joined the chorus of Fed speakers advocating a rate hike “soon”. The comments caused a limited further dollar uptick early in Asia. However, FX and interest rate markets have largely discounted a March rate hike. USD/JPY hovers sideways in the 114 area, near the recent highs. EUR/USD stabilizes in the 1.0535 area. Most Asian equities show modest gains (except for mainland China), that fall shy though with WS euphoria yesterday. The more modest risk sentiment might slow further USD gains.
Today, the market expects the February EMU HICP inflation to increase from 1.8% to 2.0% Y/Y. So, the ECB target might be reached. The core is expected stable at a rather low 0.9%. The headline inflation number, together with strong eco data, increases chances that the ECB will prematurely dial back its asset purchases in H2 of 2017. Regarding central bankers, ECB Lautensclaeger, a hawk, will speaks after closure. Yesterday, USD investors adapted positions for a March Fed rate hike. The continuation of the risk rally was also slightly USD positive. The trade-weighted dollar gained about 1% since to the start of the rebound Tuesday. This is a good gain, but shows no USD euphoria. Especially the decline of EUR/USD was moderate. The market was probably still a bit ‘euro short’ due to recent uncertainty on France. Today, we expect some consolidation on yesterday’s rally. (no important US data. 2% EMU inflation in theory could be slightly supportive for the euro). At the same time, the dollar is well supported in a context of rising global yields. Equities remain a wildcard. A correction could cause some modest USD profit taking, but for now there is no clear sign that the reflation trade might change course
Global context. The dollar corrected lower since the start of January, but bottomed early February supported by Trump’s tax promise. Underlying euro weakness due to political uncertainty in the area was a factor too. Over the previous days the focus shifted from US fiscal policy to the Fed talk, preparing markets for a rate hike in the near future. We assume EUR/USD 1.0874 to be a solid resistance and favour a sell EUR/USD on upticks approach. 1.0494 is first intermediate support ahead of the 1.0341 correction low. The downside test of USD/JPY is also rejected. USD/JPY 111.60/111.16 (Range bottom/38% retracement of the 99.02/118.66 rally) remains key support. On the topside 114.96 is a first point of reference. So, USD sentiment is constructive, but for now both EUR/USD and USD/JPY haven’t broken any important technical level yet.
EUR/USD declines as USD rebound, but no important support is broken yet.
EUR/GBP nearing first (minor) resistance
Yesterday, the UK manufacturing PMI declined more than expected, but Sterling hardly reacted. Even so, there were tentative signs of underlying sterling softness, as EUR/GBP lost hardly ground despite the EUR/USD decline. Around noon, sterling selling intensified. Uncertainty on the outcome of the Brexit vote in the House of Lords added to sterling caution. Later in the session the Upper House indeed voted for a change in PM May’s Brexit law. The vote probably won’t change the government’s Brexit roadmap in a profound way. Even so, it illustrates that the Brexit process is facing plenty of hurdles. Sterling lost gradually further ground. EUR/GBP finished the day at 0.8579. Cable dropped below the 1.23 level, mostly on USD strength.
Today, the UK construction PMI is expected to decline slightly from 52.2 to 52.00. The report is not so important for markets, but a negative surprise, after yesterday’s miss in the manufacturing measure, might be slightly sterling negative. There will also be headlines on the rejection of the Brexit Bill. Sterling sentiment has softened a bit of late. It was/is difficult for cable to outperform EUR/USD as is often the case with USD strength. Early last week, the euro sell-off pushed EUR/GBP to the 0.84 area, but a sustained break lower didn’t occur. EUR/GBP is currently nearing a first resistance at 0.8592. A break would suggest a further loss of momentum of sterling. Longer term, we have a sterling negative view, as the Brexit will negatively impact the UK economy
EUR/GBP: nearing a first resistance at 0.8592.