Sunrise Market Commentary
- Rates: Consolidation ahead of Fed meeting
Today’s eco calendar is empty apart from the start of the US refinancing operation. That could spark some underperformance of the US Note future vs the Bund, but we expect trading to occur within existing (sideways) ranges ahead of Wednesday’s Fed meeting. Volumes are expected to decline. Risk sentiment is a wildcard.
- Currencies: USD awaiting guidance from the Fed after soft wage data
The USD rebound slowed on Friday as US wage data outweighed strong job growth. More USD consolidation might be on the cards as investors await Wednesday’s Fed policy statement. USD/JPY resilience might be an indication that dollar sentiment isn’t too bad.
The Sunrise Headlines
- US stock markets closed around 0.5% higher on Friday with a new closing high for the S&P 500 after a solid US paryolls report. Asian stock markets record gains as well this morning with China outperforming (+1%).
- The White House is preparing to roll out a long-delayed infrastructure rebuilding plan in January, as President Trump’s advisers bet that voters want a $1 tn road-and-bridge-building plan—even though it is opposed by some lawmakers
- China’s producer price inflation slowed to a four-month low in November (5.8% Y/Y) as factory activity softened due to the government’s efforts to curb pollution, cooling demand from factories for raw materials.
- New Zealand’s government named pension fund chief Adrian Orr as the new governor of the nation’s central bank, triggering a rally in the local dollar as markets prepared for changes to the monetary policy mandate.
- OPEC and its global allies including Russia may end their production cuts before 2019 if the crude market re-balances by June, Kuwait’s oil minister said.
- President Trump plans to deliver his closing argument for the proposed Republican tax overhaul in a speech on Wednesday as House and Senate negotiators hammer out differences between their versions of the bill.
- Today’s eco calendar is empty. The US starts its mid-month refinancing operation with a $24 bn 3-yr Note and a $20 bn 10-yr Note auction
Currencies: USD Awaiting Guidance From The Fed After Soft Wage Data
USD in wait-and-see modus ahead of the Fed?
Positive risk sentiment kept the dollar near recent highs against the euro and the yen on Friday ahead of the US payrolls. US job growth remained strong, but wages again disappointed. With markets giving more weight to prices rather than activity data, the dollar declined off the intraday peak. EUR/USD closed the session at 1.1773, unchanged from Thursday. USD/JPY was more resilient and reversed most of the post-Payrolls decline. The pair finished the session 113.48.
Asian equities mostly trade with gains of 0.5% to 1.0%+, extending last week’s rebound. Volumes are below average. The (trade-weighted) dollar is cautiously ceding ground as investors are building in some caution ahead of Wednesday’s Fed policy announcement. USD/JPY set a minor ST top this morning, but currently hovers again in the mid 113 area. EUR/USD extends its post-Payrolls’ rebound and trades in the 1.1780 area. The New-Zealand government appointed Adrian Orr as new RBNZ governor. His appointment eased recent fears that the RBNZ would give less weight to the inflation target. NZD/USD rebounded to trade in the 0.69 area.
There are no data in the US today. EMU data are second tier and probably will have less impact on (global) FX trading. The eco calendar is better filled later this week with the US price data (CPI Wednesday) and retail sales (Thursday). In EMU sentiment data including the December PMI’s (Thursday) will be published. However, the focus will be on the Fed’s policy decision (Wednesday evening) and, to a lesser extent, on the ECB meeting and press conference (Thursday). Analyst expectations on the Fed rate hike intentions in 2018/2019 are quite divided/diffuse. Recent relatively soft price/wage data make some market participants wonder whether the Fed should consider a slightly slower pace of rate hikes. We don’t think that this will be the case, but uncertainty on low wages/prices might prevent further USD gains going into Wednesday’s Fed policy decision. Last week, we had a cautious positive bias on the dollar, but the payrolls were not strong enough to sustain the ST USD rebound. In this context we assume EUR/USD to consolidate in the 1.1730/1.1960 area. USD/JPY resilience might be an indication that underlying dollar sentiment is not too bad. US politics remains a wildcard for USD trading (more progress on a tax bill?).
From a technical point of view: EUR/USD set a post-ECB low mid-November, but the dollar’s momentum wasn’t strong enough. EUR/USD settled in a directionless sideways consolidation pattern in the 1.18/19 area. A return below 1.1713 would signal an improvement in the ST USD momentum. However, the payrolls were not able to force this break. So, EUR/USD still gives no clear directional signal. Next support comes in at 1.1554 (November low). USD/JPY’s momentum deteriorated early November, dropping below the 111.65 neckline. No aggressive follow-through selling occurred though. Over the previous two weeks, the pair succeeded a nice rebound, calling off the downside alert and returning to the 110.84/114.73 consolidation range. We amended our ST bias from negative to neutral. We maintain the view that a sustained break north of 115 won’t be easy.
EUR/USD:USD rebound blocked after soft US wage data
EUR/GBP test of 0.8693 support rejected
Sterling developed some kind of buy-the-rumour, sell-the-fact reaction Friday. The UK currency rallied on Thursday evening and early on Friday on headlines that the EU and the UK agreed to move to the second stage of the Brexit negotiations. Sterling touched a ST top during (cable) or soon after (GBP/EUR) the press conference of EU Juncker and UK PM May, but markets soon realized that the hard work still has to be done. The sterling rally ran into resistance and the UK currency returned some of the earlier gains. The trade deficit was smaller than expected, but data were not the focus of markets. EUR/GBP finished the session at 0.8792 (from 0.8737). Cable closed the day at 1.3390.
During the weekend, political analyses from different parties involved in last week’s agreement suggested that further progress in the negotiations will remain difficult. Regarding the eco data, Rightmove House prices this morning showed a further cooling in the UK prices (-2.6% M/M and 1.2% Y/Y). Sterling is gaining a few ticks this morning. Friday’s agreement/statement is buying the UK some time as the start of negotiations on new trade relationship is/was urgent. In this respect it can be considered as slightly sterling supportive. However, Friday’s GBP price action indicates that markets are well aware that the big works still has to be done. In this context we expect more ST consolidation of EUR/GBP in the 0.87/0.89 area. EUR/GBP 0.8693 (62% retracement) support was tested on Friday, but the test was rejected. We assume that this level won’t be easy to break short-term.
EUR/GBP downside test rejected despite ‘Brexit deal