Sunrise Market Commentary
- Rates: Test of key yield levels in US and Europe continues
Yesterday, US and German 10-year yields again tested key resistances levels as ECB’ Draghi sounded optimistic on (EMU) growth. However, a sustained break didn’t occur as positive comments from President Trump on the dollar eased pressure on US Treasuries. Even so, a break might still occur. Today’s US GDP data and a speech from President Trump in Davos are the next potential triggers. - Currencies: Dollar receives lifeline from President Trump
Yesterday, EUR/USD jumped north of 1.25 during the ECB press conference even as ECB’s Draghi mentione the strong euro as a source of uncertainty. Surprisingly, president Trump finally blocked the rise of EUR/USD as he said to favour a strong US dollar. Are the comments from President Trump a harbinger of some calm to turn to USD trading?
The Sunrise Headlines
- US equities ended the session little changed with the Dow outperforming as investors assessed the potential implications from recent gyrations in the interest rate and FX markets. Asian equity markets are trading mixed with China and Korea outperforming.
- U.S. President Trump said he ultimately wants the dollar to be strong, lifting the greenback and contradicting comments made by Treasury Secretary Steven Mnuchin earlier this week .
- Britain’s finance minister Hammond called for a modest Brexit that would keep the UK as closely aligned as possible with the EU after its 2019 exit. However sources in May’s office rebuked Hammond, saying the changes that Britain will undergo cannot be described as "very modest".
- Japan’s inflation in December continued to lag a strong economic revival. Core inflation rose 0.9% Y/Y, unchanged from November – well off the Bank of Japan’s 2 percent price goal.
- Profits for China’s industrial firms rose at the slowest pace in a year in December as anti-smog curbs hit activity, but profits clocked the fastest annual rise in six years as cost cutting and a construction boom helped businesses in 2017.
- Ireland’s central bank hiked its 2018 growth forecasts, predicting a faster rate of expansion for next year than the government has pencilled in. The CB expects gross domestic product to grow by 4.4 percent this year and by 3.9 percent in 2019.
- The calendar is well filled today. In EMU, the M3 money supply data and the ECB Survey of professional forecasters will be published. The UK will provide a first estimate of Q4 GDP growth. The US calendar contains the Q4 GDP, durable orders, the goods trade balance and inventory data. Markets will also keep a close eye on speeches from Davos, including from US President Trump.
Currencies: Dollar Receives Lifeline From President Trump
Dollar receives lifeline from President Trump
The dollar and the euro had a roller-coaster ride yesterday. EUR/USD spiked again sharply higher during the ECB press conference. ECB’s Draghi mentioned FX volatility as a source of uncertainty. He also said that some recent communication on FX was not in line with what was agreed at the level of the IMF. It didn’t to prevent a resumption of the rise of the euro. EUR/USD jumped above 1.25, supported by a positive economic assessment of the ECB. Euro strength was the dominant trend, but some underlying USD weakness was also at work. Later, the dollar received unexpected support from US president Trump. He wants to see a strong dollar, mirroring the strength of the US economy. EUR/USD tumbled from 1.25+ to below 1.24 and closed the session at 1.2396. USD/JPY finished the day at109.41, after testing 108.50 intraday.
Overnight, Asian equities are trading mixed, mirroring an indecisive close in the US. Some clam also returned to the FX market. EUR/USD hovers in the low 1.24 area. USD/JPY is trading in the mid 109. The yen weakened slightly on soft Japanese inflation data, but rebounded later.
The eco calendar is well filled today, especially in the US, with the first estimate of US Q4 GDP, durable orders and the goods trade balance. The GDP report and the trade balance data are interesting from an FX point of view. Markets will look out whether US growth surpasses 3.0%. The price deflators will also be closely watched (core PCE expected to rise from 1.3% to 1.9%). With the focus on international trade relations, the US trade deficit might get more attention than is usually the case. Evidently, most attention from (FX) markets will go to Davos. President Trump is expected the ‘defend’ its ‘America first’ agenda. Yesterday’s comments suggest that, if needed, he is more inclined to use specific trade measures, rather than aiming for a weaker dollar. Key question for EUR/USD trading is whether yesterday’s spike was some kind of an exhaustion move. Global USD strength might be mitigated after President Trump’s comments. On the other hand, the positive ECB assessment on the economy keeps the debate on a less easy ECB policy on the radar. If EUR/USD today can stay away from the 1.2537/1.2596 area, some consolidation on the euro rally/USD decline might be on the cards. For now, the jury is still out.
Yesterday, EUR/GBP extensively tested the 0.8690 support area, but the test was rejected. Euro strength during the ECB press conference was one factor. However, indications of ongoing discord within the UK government on Brexit maybe also dampened recent hope on a soft Brexit, causing some profit
taking on sterling longs. EUR/GBP closed the session at 0.8764. Today, the focus is on the first estimate of the UK Q4 GDP. A modest 0.4% Q/Q and 1.4% Y/Y is expected. If confirmed, these data suggest that the BoE should be in no hurry to raise rates anytime soon. Yesterday’s price action suggest that 0.8690 is indeed a strong support area. We don’t see a trigger for a break anytime soon.
EUR/USD: Was yesterday’s intraday reversal a sign of an exhaustion move
