Sunrise Market Commentary
- Rates: Sell-off stopped for now
Today’s calendar contains EMU and US inflation data, but for various reasons we don’t expect these to have a major impact. Yesterday’s V-shaped session suggests that the sell-off phase in bonds is over for now and consolidation is needed before new guidance will decide on the continuation of the sell-off or a more sustained recovery of core bonds. - Currencies: USD rally running into resistance
Yesterday, the rise of US yields and of the dollar ran into resistance. Markets need more evidence that the dollar will get additional interest rate support. This evidence won’t come today. It would be disappointing for USD bulls if EUR/USD would close above 1.1823. EUR/GBP holds near the recent lows, but shows no clear directional trend
The Sunrise Headlines
- US equities ended flat (NASDAQ) to minimal higher, enough to set a new all-time closing high (S&P). Asian equities perform better, maybe helped by a slightly weaker dollar. Japanese equities underperformed for the same reason.
- China’s central bank set the renminbi’s trading band weaker again on Friday after the currency hit a five-week low against the dollar during the previous session. The golden week holiday starts in China.
- Japan’s core consumer price index climbed to its highest level for the year to date in August, supported by rising costs for fuel and medical care. Core inflation rose 0.7% Y/Y in August.
- Japanese retail sales slowed in August to 1.7% Y/Y, from 1.8% Y/Y in July and largely below the 2.6% Y/Y consensus. However, both department store sales and household spending rose.
- Fed Fischer said the dot plot reflects the views of the FOMC participants, but it is a forecast, not a fact. He retires in October, meaning his words don’t carry far anymore.
- Today, the attention goes to EMU inflation and US personal spending &income, besides the Chicago PMI and the final Michigan consumer sentiment
Currencies: USD Rally Running Into Resistance
Dollar rebound waiting for new guidance
The dollar rally from earlier this week stalled yesterday. Core yields initially went higher, but it didn’t support more USD gains. In the European session, US and yields and the dollar corrected gradually lower. Markets apparently need more details on the Trump tax plan to assess its impact on growth. US eco data were OK, but with little impact on the dollar. EUR/USD finished the session at 1.1786 (from 1.1745). The S&P 500 set a minor record top, but the gain was too small to support USD/JPY. The pair closed the day at 112.63.
Asian equity markets ex-Japan are trading in positive territory. Activity slows as several markets including China prepare for holidays next week. Japan hovers around yesterday’s closing level. Japanese eco data were mixed (see headlines). The data give the BOJ every reason to maintain its very loose monetary policy. The yen lost a few ticks after the data. USD/JPY trades in the 112.60 area. EUR/USD stabilizes in the 1.1775 area.
The eco calendar is busy today. In EMU, the headline inflation is expected to have risen marginally to 1.6% Y/Y in September from 1.5% Y/Y. Based on lower than expected national figures in Spain and Germany, we see risk for a belowconsensus EMU CPI (stable 1.5% Y/Y). Core inflation is expected stable at 1.2% Y/Y. A substantial deviation from consensus is probably needed to move the euro. In the US, August Personal spending is expected weak (0.1% M/M) as indicated by the retail sales data. The PCE deflators are expected little changed to marginally higher. This indicator is important in the Fed’s inflation assessment. A positive surprise might be slightly supportive for the dollar. Michigan consumer sentiment (final) is expected to be confirmed at 95.3.
The dollar rallied strongly earlier this week, as investors realised that the chances on a Dec. Fed rate hike have risen. The US government stepped up its efforts to put tax reform on the rails. Both factors propelled US yields and the dollar, but the repositioning stalled yesterday. The dollar (and US yields) need more hard news to sustain a further rise. Today’s eco data may have intraday impact, but ‘big news’ isn’t expected. We expect calm trading at the last session of the quarter. EUR/USD dropped below a first support (1.1823). It would be disappointing for USD bulls if the pair would return (an close) north of the this level.
From a technical point of view EUR/USD hovered in a consolidation pattern between 1.1823 and 1.2070. It took time to break below the 1.1823 range bottom, but the break occurred earlier this week. The rise in US yields looks more solid and so does the rebound of the dollar. Next support in EUR/USD comes in at 1.1662.
The day-to-day momentum in USD/JPY was constructive recently, but it was primarily due to yen weakness. USD/JPY regained the 110.67/95 previous resistance, a short-term positive. The 114.49 correction top is the next important reference. The cross rate remains sensitive to changes in overall risk sentiment.
EUR/USD correction slows. Next support at 1.1662 stays out of reach for now.
EUR/GBP
GBP/EUR holding strong, but no further progress. Sterling had a roller-coaster ride yesterday. At the BoE independence conference, BoE’s Carrey reiterated that the Bank will support the UK through the Brexit process. He didn’t give much weight to the rise in inflation. Markets considered it a dovish assessment, triggering euro selling. The headlines from the UK-EU Brexit negotiations also weren’t too positive. EU’s Barnier said it can take weeks or even months to achieve sufficient Brexit progress. Sterling was sold against the euro and the dollar, but the UK currency showed good resilience later on and almost fully reversed the early losses in the afternoon. EUR/GBP closed the session at 0.8769. Cable rebounded to close at 1.3442
Overnight, UK Gfk consumer confidence was marginally better than expected at -9 (from -10). Later today, the Q2 current account, the monetary data (money supply) and the final reading of the UK Q2 GDP will be published. We don’t expected the data to have a lasting impact on trading. The latest round of the UKEU Brexit negotiations again didn’t yield much progress, but had little direct impact on sterling either. Over the previous days, the sterling rally (against the euro) lost momentum, but there is no clear sign of a significant countermove. This consolidation process might continue today.
EUR/GBP made an impressive uptrend from April to set a MT top at 0.9307 late August. UK price data amended the dynamics and hawkish BoE comments reinforced a sterling rebound. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of euro strength and sterling softness to persist. However, the prospect of (limited) withdrawal of BOE stimulus put a solid floor for sterling ST term. We look how far the current correction goes. EUR/GBP is nearing support at 0.8743 and 0.8652, which we consider difficult to break. We gradually look to by EUR/GBP on dips.
EUR/GBP: downtrend shows tentative signs of slowing.
