Sunrise Market Commentary
- Rates: German inflation numbers could test investors’ resolve
The most interesting item on today’s eco calendar are German inflation numbers. We see risks on the downside of expectations which could immediately test market’s resolve in Draghi’s contested comments. If the Bund isn’t able to recover the neckline of the bearish double top formation (164.76), it would comfort our sell-on-upticks strategy.
- Currencies: Euro extends post-Draghi rally. Dollar continues to struggle
Yesterday, EUR/USD showed sharp intraday swings, but in the end, the post-Draghi rally continued. At the same time, USD/JPY hardly profited from an intraday equity rebound. EUR/USD is setting new highs this morning. Will soft German CPI data, if they occur, be able to slow the euro rebound?
The Sunrise Headlines
- US equities rose on financial sector strength and tech rebound and closed with gains of 0.88% (S&P) and more (NASDAQ +1.43%). Positive sentiment extended into Asia trading but at a somewhat more moderate pace.
- Oil continued its six day rebound with Brent oil now at $47.5/barrel. Before talking about a sustained rise, we would like to see the Brent oil price breaking the technical $48.29/barrel level.
- For the first time since the start of the stress tests 7 years ago, US regulators are allowing all tested banks to pay out almost all their earnings to shareholders. This signals the regulators’ confidence in the health of the financial system.
- UK Prime Minister May’s minority administration won the first parliamentary test yesterday ahead of the final vote of her Queen’s Speech later today. We expect May to win the final vote with help of the DUP party.
- The eco-calendar is quite light today with the third US GDP-reading and American jobless claims. In the EMU, EC confidence indicators will shed light on Eurozone sentiment and German CPI on inflation dynamics
Currencies: Euro Extends Post-Draghi Rally. Dollar Continues To Struggle
EUR/USD maintains post-Draghi gains
The Draghi comments from Tuesday still dominated EUR/USD trading yesterday. The pair extended its rally to the high 1.13 area early in the session. Market rumours suggesting that the ECB-president was misinterpreted caused a temporary correction. However, it was soon undone as BoE’s Carney said that the BoE also considered a gradual tightening. EUR/USD closed session at 1.1378, within reach of the correction top. USD/JPY hovered mostly in the low 112 despite an intraday equity rebound.
Overnight, Asian equities go higher in the slipstream of WS. The dollar remains in the defensive. EUR/USD touched a new correction top north of 1.14. USD/JPY still doesn’t profit from the broad equity rebound. The pair hovers in the 112.25 area. The Yuan continues its rebound against the dollar, trading at USD/CNY 6.78.
Today, the EC economic confidence should confirm the strong EMU recovery. German inflation is expected flat on the month and 1.3% Y/Y, down from 1.4% Y/Y in May. The June Italian inflation surprised on the downside 0.2% M/M decline). So, there are some downside risks. Even an expected outcome would confirm that inflation is cooling. Yesterday, rumours that Draghi’s hawkish comments were misinterpreted, failed to stop the euro rebound. Will soft EMU inflation data be able to do the job? The final Q1 US GDP release is outdated. Initial claims stabilized at very low levels and no change is expected. Weekly ‘noise probably won’t change fortunes for the dollar. Fed Bullard speaks on monetary policy, but as he did so several times in recent days, no new info is expected.
Yesterday, the euro remained the ‘by default’ winner, despite attempts to downplay the Draghi comments. Soft Germany inflation data and ST overbought conditions might slow the euro rally. However, it is unlikely to cause a ST trend reversal. At the same time, sentiment on the USD remains fragile. The US dollar desperately needs good news (both on activity and price data) for markets to become again more confident on further Fed policy normalisation. We are neutral EUR/USD and look for a breather on the recent EUR/UJSD rally.
Yesterday’s intraday price development in USD/JPY was again disappointing. Core yields more or less maintained Tuesday’s increases and equities rebounded. Evens so, the pair hardly made any further headway. We remain cautious on USD/JPY longs.
Technical picture: Euro prevails. USD struggles
Early May, EUR/USD failed to break below the 1.0821/1.0778 support. Poor US data and US political upheaval propelled EUR/USD to a test of the 1.1300 area going into the FOMC decision, but the test was rejected. Earlier this week, a combination of hawkish ECB comments and negative US headlines pushed EUR/USD for an intensive test of the 1.1300/66 resistance are. The area is broken, if the break is confirmed, it would be a significant technical signal and open the way to the 1.1616/1.1714 LT correction tops. A return below 1.1220 (STMA) would be a first indication that the euro rally is easing. A drop below 1.1119 would call off the downward alert.
The USD/JPY rally ran into resistance in early May and the pair returned lower in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair beyond a first minor resistance at 110.81. The pair regained the 112.13 correction top early this week, but there are no real follow-through gains , So, the break isn’t confirmed yet. A break would improve the ST-picture. Even so, were remain cautious on further USD/JPY gains.
EUR/USD tends to break above the key 1.1300/66 resistance on Draghi comments
EUR/GBP: topside test rejected
Yesterday, it looked like sterling traders were heading for a calm session…. till late in the afternoon. Cable traded sideways in the lower half of 1.28. The price moves in EUR/GBP were primarily swings in the euro in the wake of Tuesday’s Draghi comments. EUR/GBP traded at minor new highs in the 0.8870/80 area, but lost gradually a few ticks. Early afternoon, the pair tumbled to the low 0.88 on the rumours that Draghi was misinterpreted by markets. However, BoE’s Carney changed the script again as he indicated that some tightening might be warranted if the growth/inflation trade-off lessens. Quite a big U-turn from recent comments of the BoE governor. Sterling jumped sharply higher. EUR/GBP closed the session at 0.8802. Cable rallied against a weak dollar and closed at 1.2926.
Today, the UK money supply and credit data will be published. A slightly easing is expected, but we doubt the data will change the debate on monetary policy. There will also be plenty of headliners on the vote on the program of the May minority government. However, markets will ponder the consequences from Carney’s hawkish U-turn. The Carney comments will probably put a floor for the dollar short-term. However, we don’t expected a protracted sterling rally anytime soon, especially not against the euro. We still look to buy EUR/GBP in case of more pronounced downticks
From a technical point of view, EUR/GBP set a minor top north of the 0.8854/66 resistance (2017 top), but a sustained break didn’t occur. Yesterday’s setback probably block further gains ST. A return below the 0.8655 correction low would indicate easing pressure on sterling. Such a break lower will be difficult. A EUR/GBP buy-on-dips approach remains favoured.
EUR/GBP: topside test rejected