Sunrise Market Commentary
- Rates: Test of US 10-yr yield resistance ongoing
Today’s eco calendar contains German Ifo and US durable goods orders. We expect their impact to be of intraday importance at best ahead of tomorrow’s ECB meeting. Technically, the US 5-yr yield moved sustainably north of 2% while the test of US 10-yr yield resistance (2.4%) is ongoing. A break ahead of the ECB seems difficult. - Currencies: Dollar struggles to extend gains even as core yields rise
The dollar showed again no clear trend yesterday as investors await the ECB decision. Today, IFO business sentiment and the US durable orders might have intraday significance for FX trading, but we don’t expect the major USD cross rates to break important technical levels. The recent sterling rebound had no strong legs as Brexit optimism fades again
The Sunrise Headlines
- US big industry earnings dazzled, driving the Dow (+0.72%) to another record. Other US indices only gained around 0.1%. Asian stock markets eke out small gains overnight. India outperformed after cabinet approved a $32 bn plan to recapitalise its state banks over the next two years.
- Politicians from four German parties seeking to form a first-of-its-kind coalition government agreed not to increase the country’s debt load in order to fund sought-after tax cuts, subsidies and investments.
- The Chinese Communist party failed to designate a clear potential successor to its general secretary for the 1st time in a quarter-century, raising the possibility that Xi Jinping will attempt to remain in power well into the next decade.
- Australia’s core inflation unexpectedly slowed in the September quarter as electricity prices spiked by less than forecast. The currency dropped half a cent against the US dollar with AUD/USD heading to 0.77.
- The fault lines within the Republican Party cracked further as feuding between President Donald Trump and senators intensified within the US Capitol, and anti-establishment activists claimed political momentum outside of it.
- Today’s eco calendar contains Germen IFO investment sentiment, UK Q3 GDP, US durable goods orders and the rate decision by the Bank of Canada. Germany and the US supply the market
Currencies: Dollar Struggles To Extend Gains Even As Core Yields Rise
Dollar rebound stalls even as core yields rise
Trading in the major USD cross rates showed again no consistent trading pattern yesterday. An initial decline of EUR/USD was blocked after mixed, but still strong EMU PMI’s. A further rise in US and EMU yields supported the likes of USD/JPY and EUR/JPY as investors continue to look forward to the ECB policy decision later this week. EUR/USD closed the session at 1.1761. USD/JPY finished at 113.90.
Overnight, Asian equity indices trade with moderate to decent gains. Japan underperforms. Risk sentiment has currently little impact on the dollar. EUR/USD is trading in well-known territory in the 1.1760 area. USD/JPY is also holding near yesterday’s level (high 113 area). Australia Q3 CPI rose less than expected and pushed the Aussie dollar more than half a big figure lower (AUD/USD 0.7720). A sustained break below 0.7733 would deteriorate the short-term picture.
Today, the October German IFO business confidence is expected to have stabilized. The German PMI dropped in October (due to the services sector) suggesting some downside risk to the IFO. That shouldn’t be too awful, as the level remains sky-high. Even so, a third consecutive decline would be a warning signal. In the US, the durable orders are expected to have risen by 1% M/M following a 2% M/M increase in August. The risk for the headline figure is on the downside, but the core of the report should be ok. US new home sales fell unexpectedly sharply in August (the impact of the hurricanes) Another (small) decline is expected.
The impact of the data on the EUR/USD or on other major USD cross rates might be modest as investors have plenty of other issues on the radar. We don’t expect the IFO to be negative for the euro in case of a small miss. Yesterday, the euro was well bid after mixed PMI’s. Investors apparently don’t like to be positioned euro short going into tomorrow’s ECB meeting.. A decent US durable orders report might be slightly USD supportive, but it won’t trigger a break beyond important resistances. Spain, the nomination of the next head of the Fed and the political debate on the US tax reform remain wildcards. We also keep an eye at the equity indices. Some kind of fatigue on the long rally might weigh on USD/JPY and even on USD/EUR
From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern, but there was no sustained follow-through price action, which was disappointing for EUR/USD bears. We maintain a cautious sell-on upticks bias. The pair needs to drop below 1.1670/62 to give comfort to EUR/USD bears. The USD/JPY momentum was positive in September. The pair regained 110.67/95 resistance, a short-term positive. The 114.49 correction top is the next resistance. Sentiment improved further last week, but we still assume that a break beyond 114.49 will be difficult. This week’s failed return above 114 confirms this view
EUR/USD: holding within established ranges going into ECB meeting
EUR/GBP
GBP rebound already aborted
Yesterday, sterling erased part of the post-EU summit gains. The exchange of words between EU and UK officials turned more constructive, even without any concrete progress in the negotiations. UK officials also felt that an agreement on a transition period is unlikely until there is sufficient progress on the nature of the future EU-UK trade relationship. This scenario leaves UK businesses in uncertainty as the Brexit negotiations drag on. EUR/GBP rebounded off the sub-0.89 recent lows and closed the session at 0.8956. Cable also ceded ground and finished the session at 1.3134.
Today, the first estimate of the UK Q3 GDP will be published. Growth is expected similar to that of the second quarter at 0.3% Q/Q and 1.5% Y/Y. We have no good reason to take a different view from the consensus. A weak figure or an unfavourable composition of growth will add to the markets’ conviction that the room for the BoE to raise rates beyond a sole rate hike in November is very limited. It also looks that the EU and UK have returned to their tough Brexit positions, despite a more constructive tone at the EU summit last week. In this context we see little upside for sterling.
EUR/GBP staged a strong uptrend from April till late August and set a top at 0.9307. Rising UK inflation and the BoE preparing markets for a November rate hike triggered a sterling rebound, but it has run its course. EUR/GBP supports at 0.8743 and 0.8652 proved too difficult to break. The recent rebound above 0.89 improved the ST technical picture of EUR/GBP, but for now there were no convincing follow-through gains. EUR/GBP 0.9026 is 50% retracement of the recent countermove.
EUR/GBP: holding tight ranges, but bottom looks well protected
