Sunrise Market Commentary
- Rates: Bonds to make further headway
The North Korean ICBM treat and the feared havoc caused by hurricane Irma support core bonds ahead of the weekend. The technical break lower of US Treasuries adds to the bond positives. Overnight comments of Fed Dudley will likely be ignored
- Currencies: USD red alert. USD/JPY and EUR/USD on the verge of breaking key levels
Soft Draghi comments don’t stop the comeback of the euro. At the same, all kind of event risk hammers US yields and deprives the dollar of its highly needed interest rate support. EUR/USD is tests the cycle top and USD/JPY is drops below the key 108.13 range bottom. A sustained break would materially change the technical picture of the dollar.
The Sunrise Headlines
- US equities ended the session broadly unchanged in a essentially sideways oriented trading session. Asian equities are trading mixed.
- NY Fed Dudley, a key FOMC player, reiterated the need to continue raising interest rates while conceding that the US central bank’s inflation model may be in for a rethink soon, as structural developments may be behind low inflation.
- Cleveland Fed Mester, a hawk, broadened her argument for sticking to a gradual path of interest-rate increases, urging her colleagues to stay the course despite weak readings on inflation. She firmly wants another rate hike in 2017. Kansas Fed George also remained in favour of continuing tightening.
- Japan revised down its second-quarter economic growth to an annualized 2.5% from 4%, weaker than expectations for a revision to 2.9%.
- President Trump signaled he was open to making more deals with Democrats in Congress despite anger from fellow Republicans over a bipartisan agreement that passed the Senate yoking hurricane aid to an extension of the government’s ability to borrow.
- Irma tore through the Caribbean, ravaging islands including St. Martin and Barbuda and bringing rain and heavy winds to Puerto Rico. The Category 5 storm is forecast to hit Florida directly by Sunday.
- Today’s calendar contains only national EMU data. The UK calendar is busy. ECB Liikanen/Weidmann/Rimsecics and US Fed Harker speak. North Korea, the Catalonian secession plans and the tropical storms will get extensive coverage
Currencies: USD Red Alert. USD/JPY And EUR/USD On The Verge Of Breaking Key Levels
USD Red alert: key technical levels are challenged
EUR/USD rallied ahead of the ECB’s policy decision. Draghi didn’t bring any specific news on changing APP, he committed to keep interest rates low for long and showed concern on recent ‘euro volatility’. The soft ECB assessment hardly slowed the EUR/USD rebound. EUR/USD came within reach of the 1.2070 cycle top, but finally shifted into a lower gear. EUR/USD closed the session at 1.2023 from 1.1917. However, it was not only euro strength. The dollar remained in the defensive against most other majors. USD/JPY dropped to the low 108 area and closed the session at 1.0845. The key 108.13 support is under attack
This morning, Asian equities are trading mixed with China again outperforming. Chinese exports were slightly below consensus. Imports were above consensus. Japanese Q2 GDP growth was downgraded more than expected from 4.0% to 2.5% Q/Qa. However, it didn’t stop the rise of the yen. USD/JPY is still extensively testing the key 108.13. The decline of the dollar against the euro also continues unabatedly. EUR/USD currently tries to break the 1.2070 previous top. So, both EUR/USD and USD/JPY are testing key technical levels.
There are hardly any eco data with market moving potential in the US and Europe today. Geopolitical issues like North Korea, Catalonia and the tropical storms may affect market sentiment. ECB members Weidmann, Liikanen and Rimsevics, hawks, speak. Will they put other emphasises on future policy than president Draghi yesterday? The influential NY Fed president Dudley hasn’t changed his views on monetary policy much. He still thinks it’s appropriate to continue removing policy accommodation, but is also surprised by the persistent inflation shortfall. Later today, Philly Fed Harker speaks early in US dealings.
Yesterday, the ECB delayed the communication on APP tapering till October. Draghi maintained a soft tone and indicated that the rise of the euro is on the ECB’s radar. However, it didn’t prevent further euro gains. Markets apparently take the view that a further ECB policy normalisation/APP tapering will come anyway. For now, this continues to support the euro. The fact that this debate on ECB tapering will continue till the next ECB meeting probably won’t stop the rise of the euro. At the same time, the dollar remains in the defensive across the board. Several events risks (Korea, storms, domestic political uncertainty) continue to haunt to dollar.
Global uncertainty keeps US yields on a downward trajectory. The dollar continues to lose interest rate support. The decline in US yields and of the dollar has probably gone more than far enough given recent US eco data, which were still fairly good. However, this assessment clearly doesn’t help the dollar shortterm. Especially ahead of a weekend with all kinds of event risk looming (what will be the impact of two hurricanes on the economy?), one might expect risk aversion to prevail. At this stage, the yen, and to a lesser extent the euro, play the safe haven role, rather than the dollar. In a day-to-day perspective, we don’t row against the euro positive/USD negative tide. EUR/USD breaking beyond 1.2070 and/or USD/JPY breaking below 108.13 support would be another important signal that sentiment on the dollar is deteriorating further. This is phase red alert for the dollar! We don’t try to catch the falling knife of the US currency. USD stoploss protection looks highly warranted.
EUR/USD: euro sets new cycle top
EUR/GBP correction blocked on overall euro strength
Global factors drove sterling yesterday. Especially the euro moves after the ECB’s policy decision dominated sterling trading. The rise of EUR/USD ahead and during the press conference blocked the recent downward correction of EUR/GBP. The pair rebounded from the 0.9130 area to the 0.92 area and closed the session at 0.9177. At the same time, cable partially followed the EUR/USD rebound. GBP/USD finished the day at 1.3101.
Today, UK eco calendar is well filled with the July industrial production data, the construction output, the trade balance and the NIESR August GDP estimate. The data might have some intraday impact on GBP. We don’t expect the data to be really negative. However, global factors/markets trends will dominate sterling trading. If global uncertainty continues to rise, yesterday’s price pattern of a higher euro (and higher EUR/GBP) and further gains of sterling against the dollar might reoccur.
From a technical point of view, EUR/GBP cleared 0.8854/80 resistance (top end June), opening the way for further gains. The move was the result of euro strength. Simultaneously, UK price data were soft enough to keep the BoE sidelined. MT, we maintain a buy EUR/GBP on dips approach as we expect the combination of relative euro strength and sterling softness to persist. The 0.9415 ‘flash-crash spike’ is the next target on the charts. However, we wait for a correction, e.g. to the technical support in the 0.88/89 area, to sell sterling again versus the euro.
EUR/GBP rebounds on overall euro strength, but sterling holds up reasonably well