Sunrise Market Commentary
- Rates: Fed more confident in economy and inflation
The Fed kept its policy rate unchanged, but sounded more upbeat on growth and on inflation. The outlook warrants further gradual rate increases. The market reaction was rather modest. Core bond momentum remains bearish, but the sell-off could slow ahead of tomorrow’s payrolls.
- Currencies: USD little changed post Fed
The dollar traded in the defensive yesterday ahead of the Fed meeting. The USD gained marginally ground as the Fed slightly upgraded its assessment on inflation and growth. However, no technically relevant levels have been regained yet. The markets are cautiously giving a higher probability to four rate hikes this year. Will this finally help the dollar?
The Sunrise Headlines
- US stock markets ended close to opening levels with another round of solid corporate earning putting investors back in the buying mood following a 2-day sell-off. Most Asian stock markets eke out gains with China underperforming.
- The Fed kept its policy rate unchanged at 1%-1.25%. The policy statement signalled greater confidence in officials’ upbeat economic outlook. It also offered slightly more conviction that inflation would move higher in 2018.
- China’s manufacturing sector sustained growth at multi-month highs in January, according to the Caixin PMI (51.5), as factories continued to raise output to meet new orders, suggesting resilience in the Chinese economy.
- US oil production surged above 10 million barrels a day for the first time in more than four decades, another marker of a profound shift in global crude markets.
- EU Brexit negotiators have set out a tough line on financial services, ruling out an ambitious trade deal for the lucrative sector and arguing that Europe would benefit from a smaller City of London, according to confidential discussions.
- Carles Puigdemont has said in a leaked private message to an ally that his drive to create a new independent Catalan republic was over and that the Spanish government had won.
- Today’s eco calendar contains manufacturing surveys in EMU (final PMI), UK (PMI) and US (ISM). Weekly jobless claims will also be released. The CNB is expected to hike rates and ECB Praet is scheduled to speak
Currencies: USD Little Changed Post Fed
Dollar little changed post-Fed
The dollar initially remained under pressure in the run-up to the Fed policy statement yesterday. The EMU inflation was soft at 1.3% Y/Y, but didn’t hurt the euro. The dollar didn’t profit from very strong ADP job growth. The dollar finally found a better bid in the last hours before the Fed decision. The Fed as expected left its policy unchanged. Yellen and co grow more confident on the economic expansion. They also see signs of a gradual rise in inflation/inflation expectations that warrants further gradual policy tightening. The market reaction was very limited. After some hesitation, the dollar gained a few more ticks. EUR/USD finished the session at 1.2424. USD/JPY closed at 109.19.
Asian equities mostly trade in positive territory overnight with Japan outperforming and China underperforming. USD/JPY extends most gains north of 109. EUR/USD hovers in the low 1.24 area. The Aussie dollar is drifting away from the recent top. Yesterday’s soft inflation data and weak housing data today are weighing on the currency.
The eco calendar contains the final EMU manufacturing PMI and the US manufacturing ISM. The headline PMI is expected to ease from 59.3 to 58.6, more or less in line with evidence from regional indicators. The price index is expect to stay at a very high level (68.8). Aside from the data, markets will ponder the consequences from yesterday’s Fed assessment. The debate on 3 or 4 rate hikes this year continues. Chances on four hikes are gradually rising. Question is whether this will be enough to finally put a floor for the dollar.
The dollar developed a very tepid bottoming out process since the end of last week, but didn’t regain any technically relevant level yet. For now, some further consolidation might be on the cards going into the payrolls. EUR/USD 1.2537/98 is the first topside resistance. EUR/USD 1.2323/35 is a minor support short-term. A break below 1.2165 would call off the ST downside alert (for the dollar).
Sterling made some intraday swings yesterday probably mostly driven by end of month positioning. Today, the UK Manufacturing PMI is expected to improve slightly from 56.3 to 56.5. A positive surprise might be slightly supportive for sterling. However, political noise both on the relations between the UK and the EU and on the internal discord with May’s party will probably dominate the headlines. For now we expect EUR/GBP to hold the 0.8690/0.8928 range.
EUR/USD: no big reaction post-Fed. Topside run a bit exhausted?