Sunrise Market Commentary
- Rates: Side-lined ahead of central bankers and US eco data?
Today’s eco calendar remains uninspiring. We expect trading to be sentiment-driven and technical in nature. The downward equity correction hasn’t run its course yet, but failed to support core bonds last week. Investors might decide to stay sidelined ahead of key US eco data later this week and with an avalanche of central bankers scheduled to speak - Currencies: Dollar to trade cautiously ahead of key eco data
At the end of last week, the dollar couldn’t profit even as core bond yields maintained an upward bias. US traders look out for the key US eco data later this week, including CPI and retail sales. Soft data won’t derail a Fed rate hike, but might still weigh on the USD. Sterling is again under pressure as Conservative PM’s are said to challenge PM May’s leadership
The Sunrise Headlines
- US stock markets closed marginally lower on Friday in an uneventful trading session. Asian stock markets are mixed overnight with Japan underperforming and China outperforming.
- Sterling loses ground this morning after reports that a group of Conservative lawmakers had agreed to sign a letter of no-confidence in British PM May.
- Political turmoil in Australia risks undermining fragile economic confidence as the loss of another lawmaker in the dual-citizenship fiasco left PM Turnbull leading a minority government.
- Philly Fed Harker, voting FOMC member, said he’s looking for another rate increase this year and that he is comfortable with three hikes in 2018 if inflation picks up.
- German political parties grappling to form a government have set a deadline of Thursday to produce an agreement that will pave the way for formal coalition talks.
- The head of the House Republicans’ tax-writing committee said he would not accept elimination of a federal deduction for state and local taxes, opposing a proposal from Senate Republicans that would hike taxes for some middle class Americans.
- Today’s eco calendar is empty. Italy holds a BTP auction while ECB Constancio and Nowotny are scheduled to speak
Currencies: Dollar To Trade Cautiously Ahead Of Key Eco Data
USD to trade cautiously ahead of key US eco data
Global markets calmed down on Friday after Thursday’s uptick in volatility. There were only second tier eco data. Changes in interest rate differentials were very small. If anything they widened marginally in favour of the dollar, but the US currency remained slightly in the defensive. EUR/USD remained within the established short-term trading range. The pair closed the session at 1.1665 (from 1.1642). USD/JPY finished the day little changed at 113.53.
Asian equities are trading mixed overnight. Chinese indices outperform. Most other indices show small losses with Japan again underperforming. The risk-off sentiment in Japan doesn’t yield to any sustained gains for the yen. USD/JPY still trades in the mid 113 area. The dollar was slightly better bid early in the session, but there is no clear trend. EUR/USD trades in the 1.1650 area. The Aussie dollar took a hesitant start as PM Turnbull’s government lost its majority, but AUD/USD soon returned to the mid 0.76 area.
Today, there are not important data in the EMU or in the US. ECB’s Constancio and Nowotny are scheduled to speak, but we don’t expect their appearances to have a big impact on (FX) markets. So, global sentiment and technical considerations will set the tone for euro and USD trading today.
Equities show no clear trend. Last week, core bond yields maintained an upward bias despite an up-tick in volatility on the equity markets. In the end, the dollar lost slightly ground, but EUR/USD and USD/JPY didn’t break any technically important levels. Uncertainty, on the US tax bill remains a potential negative for the dollar. Later this week the focus will return to a series of important eco data, including the US CPI and retail sales on Wednesday. Both data series are expected rather soft after a strong reading last month. A December Fed rate hike is almost fully discounted. We don’t expect the Fed to change course even if the data are soft. Even so, weaker than expected data might create some doubts on the interest rate markets and maybe even more for the dollar. We start the week with a neutral/cautious bias on the dollar as we think that the US currency is vulnerable to some further losses if this week’s eco data disappoint. We don’t expect any USD setback to go very far though
From a technical point of view, EUR/USD dropped below 1.1670/62 support, but subsequent follow-through price action occurred very slow. Still the pair dropped to a new post-ECB low on Tuesday last week. A sustained break would confirm that the recent EUR/USD uptrend is broken. EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside target on the charts. A sustained return north of 1.1690, would question recent cautious downside momentum. Next resistance stands at 1.1837/80. USD/JPY’s momentum was positive in past months. The pair regained 110.67/95 resistance and tested the 114.49 MT range top, but the attempt failed. A sustained break would improve the technicals. We remain cautious to preposition for further USD/JPY gains. Last week’s price action remained unconvincing despite a solid interest rate support.
EUR/USD: holding within established range. Focus on Wednesday’s US eco data
EUR/GBP
Political uncertainty weighs again on sterling
Sterling sentiment improved on Friday. The ‘sterling glass’ was again half full. The UK trade deficit narrowed more than expected, supported by good export growth. At the same time, UK September production data were very strong (0.7% M/M vs 0.3% expected). Friday’s data don’t change the overall picture on the UK economy, but they give some counterweight to other disappointing eco data of late. Markets concluded that it remains possible to start negotiations on the future relationship after the December EU summit. EUR/GBP closed the session at 0.8841 (from 0.8856). Cable finished at 1.3196 (from 1.3145).
During the weekend, the Sunday Times reported that 40 conservative MP’s agreed to sign a no confidence vote against PM May. A new fight on the leadership in the conservative party and pressure to make progress on the Brexit negotiations before the December EU summit are weighing on sterling. EUR/GBP trades again in the high 0.88 area this morning. Today, there are no important data, but the UK calendar is well filled later this week starting with the CPI tomorrow. The CPI is expected to have gone north of 3.0% in October. Even so, we doubt the data to be of much support for sterling as long as the political context isn’t cleared out. We maintain an cautious upward bias for EUR/GBP.
MT technical: Sterling rebounded in September as the BoE prepared markets for a rate hike. This rebound ran into resistance as markets anticipated that any rate hikes would be very gradual and limited. This view was confirmed at this month’s BoE policy meeting. EUR/GBP currently trades in a 0.8733/0.9033 consolidation range. A downside test of this range was rejected. We maintain the view that the 0.8733 -0.8652 support area will be tough to break in a sustainable way. A EUR/GBP buy-on-dips approach is favoured. EUR/GBP 0.9023/33 is the first important resistance.
EUR/GBP: political uncertainty to reaccelerate GBP-selling
