Sunrise Market Commentary
- Rates: Steeper US yield curve after Fed meeting?
The market implied probability of a Fed rate hike tonight is 20%. We expect the Fed to postpone a continuation of its tightening cycle to March, but upgrade its assessment on the economy and on inflation. This combination could trigger a steepening of the US yield curve with a short term downward correction at the front end and higher rates at the 10y. - Currencies: Will Fed help to stop the USD bleeding?
The dollar failed to build on the bottoming out process that started at the end of last week. Today’s eco calendar is well filled, but the focus turns to the Fed statement. We expect the Fed to upgrade its assessment on growth and on inflation. Will this be enough to help to put a floor for the dollar?
The Sunrise Headlines
- US stock markets corrected around 1% lower yesterday with Dow Jones underperforming. The sell-off eases overnight bar Japan. Strong Samsung earnings and the announcement of a stock-split cause Korean outperformance.
- In his first State of the Union, President Trump again called for a bill that would underwrite a program to repair the nation’s infrastructure, relying on state/local government funding along with private investment that would add up to $1.5tn.
- The BOJ offered to buy more bonds (3-5y tenor) at a regular operation for the first time since July, helping to bring down yields and weaken the yen as Governor Kuroda reaffirmed a commitment to his ultra-loose monetary policy
- Powerful German union IG Metall has called for full-day walkouts through Friday, firing a last warning shot before it ballots for extended industrial action amid a dispute over wages and working hours.
- China’s manufacturing sector grew at a slower pace than forecast in January (51.3 vs 51.6) as output and new orders dipped. The non-manufacturing PMI unexpectedly improved from 55 to 55.3.
- Australian CPI rose 0.6% Q/Q in Q4, undershooting 0.7 Q/Q forecast and unchanged from the September quarter. Inflation rose 1.9% on a yearly basis, below 2% consensus but picking up from a 1.8 Y/Y increase.
- Today’s eco calendar contains EMU inflation data, German unemployment figures, US ADP employment change, Chicago PMI and the Fed meeting. Germany taps the market and ECB Coeuré is scheduled to speak
Currencies: Will Fed Help To Stop The USD Bleeding?
Will Fed help to stop the USD bleeding?
The dollar was again the defensive yesterday. EUR/USD rebounded off the 1.2335/37 ST lows. The traded-weighted USD also didn’t make any headway. EMU eco data were mixed with German inflation printing soft. US consumer confidence was OK, but didn’t support the dollar. Investors stayed cautious ahead of Trump’s State of the Union and today’s Fed statement. A further correction of US equities had little impact on USD. USD/JPY held up well, closing at 108.78. EUR/USD closed at 1.2405.
Overnight, US president Trump didn’t bring many details on policy. He asks Congress $1.5tn for infrastructure spending. The BOJ offered to buy more bonds at a regular operation. BOJ’s Kuroda committed to further policy easing in order to reach the 2% target. The BOJ tries to counter recent speculation on a reduction in policy stimulation. USD/JPY temporary revisited the 109 barrier, but trades again in the 108.70 area. EUR/USD trades (1.2440) with a cautious upward bias.
Today, the calendar contains the German & EMU labour data and the EMU CPI. CPI is expected to ease to 1.2% from 1.4%, but will this change fortunes of the euro? The reaction to the US ADP labour report and the Chicago PMI will probably be muted just hours ahead of the FOMC statement. We see risks for the Fed to indicate better growth prospects and more conviction on reaching the inflation target. In theory this should confirm the recent uptrend in US yields and be supportive for the dollar. However, of late the greenback reacted very muted to supportive news. So, we look out whether this time is different. From a technical point of view, EUR/USD 1.2537/98 marks important topside resistance. A break would signal more trouble for the dollar. A sustained return below 1.2323/1.2165 improves the ST picture for USD.
Sterling trading faced conflicting signals yesterday. A new discord within the conservative party on Brexit and calls for PM May to resign were sterling negative. On the other hand, BoE’s Carney indicated that the bank could give more weight to bringing inflation back to target, raising chances for a next rate hike later this year. EUR/GBP declined further off the 0.88 area after the Carney comments. Overnight, UK eco data were mixed to marginally above consensus. For now we expect EUR/GBP to hold the 0.8690/0.8928 consolidation pattern. A topside break has become less evident after Carney’s comments
USD (DXY-trade-weighted) holding near recent low
