Sunrise Market Commentary
- Rates: Slightly negative intraday bias
Today’s eco calendar is extremely thin. The start of the US supply operation is negative for US Treasuries while progress in German coalition talks could positively impact risk sentiment and weigh on the Bund. We expect trading to be technically insignificant and occur in tight ranges though given this week’s back-loaded eco calendar. - Currencies: EUR/USD clears 1.1880 resistance area
On Friday, EUR/USD cleared the 1.1880 resistance, reinforcing the ST upside momentum. Today, the eco calendar is thin. A cautious sentiment on risk recently weighted more on the dollar than on the euro. US eco data later this week will have to be strong to improve fortunes for the dollar short term.
The Sunrise Headlines
- US stock markets ended last week on a positive note, recording gains of around 0.25% in thin “Black Friday” dealings. Asian risk sentiment is negative overnight with China and Korea (Samsung) underperforming.
- Irish PM Varadkar is close to a deal with opposition leader Martin to avoid an election, the Sunday Times reported, ahead of Tuesday’s no-confidence vote against his deputy.
- Leaders of German Chancellor Merkel’s conservative party agreed to pursue a "grand coalition" with the Social Democrats (SPD) to break the political deadlock in Europe’s biggest economy.
- China’s industrial firms weathered a broad government crackdown on financial risks as profits continued to surge last month in a stabilising force for the world’s 2nd biggest economy, which has started to cool slightly in recent months.
- Bank of Japan board member Suzuki says it’s possible for the central bank to make slight changes in its yield-curve control program when price growth approaches the 2% inflation target,
- S&P cut South Africa’s debt debt score to junk (BB+), while Moody’s also threatened to slash its ranking to the same level, raising the risk of a selloff from global indexes. USD/ZAR rose back above 14.
- Today’s eco calendar is thin with only US new home sales. The US Treasury starts its end-of-month refinancing operation with a $26bn 2-yr Note and a $34 bn 5-yr Note auction.
Currencies: EUR/USD Clears 1.1880 Resistance Area
EUR/USD holds north of 1.19
On Friday, the trend of euro resilience and USD softness continued. The euro was supported by a strong Ifo business confidence. Even so, USD weakness prevailed. A positive risk sentiment and neutral set-up in the interest rate markets were not enough to stop the bleeding for the US currency. EUR/USD regained the 1.1880 resistance and closed the session at 1.1933 (from 1.1881). USD/JPY performed better. The pair closed the session with a marginal gain at 111.53 (from 111.22).
Overnight, sentiment on Asian markets gradually tuned negative. China and south Korea are taking the lead in the correction. Japanese equities reversed an opening gain into a small losses. The correction looks primarily profit taking after recent rally. USD/JPY more or less copied the intraday price action on Japanese equity markets. An initial up-tick was reversed. USD/JPY trades again in the 111.45 area. EUR/USD trades near Friday’s closing level (1.1925 area).
Today, US New Home sales are expected to have fallen 6.3% M/M, following a steep 19% gain in the previous month.. Later this week, the EMU inflation is expected to have increased to 1.6% Y/Y for the headline and 1% Y/Y for the core inflation. The US eco calendar is busy with ISM (Friday), October spending & income (Thursday) and consumer confidence (Tuesday). The Fed Beige Book, Yellen’s testimony before the JEC (both on Wednesday) and Fed chair nominee Powell’s confirmation hearing (tomorrow) will get much attention too.
Today, sentiment on risk and technical considerations will be the key drivers for USD trading. It is unsure whether the cautious sentiment in Asia will spill-over into European or US markets. Even so, a less buoyant risk sentiment recently seldom supported the dollar. Markets will also look forward to this week’s US eco data and events. US data will probably have to surprise on the upside to change fortunes for the dollar. This is a possibility, but no certainty. The confirmation hearing of Fed’s Powell is a wild card. German coalition talks might be a slightly positive for the euro.
Last week, the dollar came under additional pressure as markets questioned the Fed’s rate hake intentions beyond December. These doubts finally propelled EUR/USD beyond the 1.1880 resistance. We still see a good chance that the Fed will realize its 2018 intentions, but there is no trigger to change sentiment on the dollar now. Last week we advocated stop-loss protection in case of a break of EUR/USD beyond 1.1880. As this has happened, there is no reason yet to row against the USD negative tide ST
From a technical point of view, EUR/USD set a post-ECB low mid-November, but regained since intermediate resistance at 1.1690/1.1837. On Friday, the pair also regained the 1.1880 MT correction top. This break opens the way for a full retracement to the 1.2092 top. The USD/JPY momentum was positive in October, but deteriorated this month. Last week, USD/JPY dropped below the 111.65 neckline. There was no aggressive follow-through selling, but if the break is confirmed, it would make the picture outright USD negative.
EUR/USD regains the 1.1880
EUR/GBP
EUR/GBP extends ST rebound
Sterling was captured in technical, order-driven trading Friday. EUR/GBP rebounded further north of the 0.89 big figure supported by the rise of EUR/USD. Cable profited from an overall weak dollar. Bank of England member Silvana Tenreyro repeated that two more interest-rate increases will probably be needed to get inflation back to target, but Brexit can change the BoE policy response. UK PM May met several EU leaders in Brussels, but there was no indication that a breakthrough in the negotiations is imminent. EUR/GBP finished the week at 0.89 trades near 0.8947. Cable closed hat 1.3337.
There are no eco data in the UK today. BoE’s Haldane speaks in Birmingham, but we don’t expect him to bring much news on monetary policy. Talks between the UK and the EU are in the last straight line to deliver a text that might convince the EU leaders to move to a next step in the Brexit negotiation. It looks that the issue of the Irish border might be a hard nut to crack. Whether or not the EU summit will be able to give the green light for further negotiations remains a binary risk. So, we don’t expect GBP investors to place big directional bets until there is clarity on this issues. The day-to-day momentum remains slightly EUR/GBP positive.
MT view/technical picture. A BoE driven sterling rebound ran into resistance early this month. Sterling declined again as markets anticipated that the rate cycle would be very gradual and limited. Brexit headlines cause day-to-day gyrations. EUR/GBP trades in a 0.8733/0.9033 consolidation range. We changed our ST bias on EUR/GBP from positive to neutral two weeks ago. The 0.9015/33 area might be tough to break short-term
EUR/GBP: moving higher in the established consolidation pattern
