Sunrise Market Commentary
- Rates: Did German/EMU inflation already peak in January?
End-of-quarter conditions and rumours about an anxious ECB lifted core bonds yesterday, with Bunds outperforming. Today, German inflation data might draw attention. Did German/EMU CPI already peak in January? It could reduce speculation that the ECB will start normalizing its policy sooner than expected and support the Bund in an intraday perspective.
- Currencies: EUR/USD corrects south as ECB speculation eases
Yesterday, EUR/USD declined further off the recent highs. Euro longs were squeezed by market rumours that the ECB was ‘unhappy’ with the hawkish market reaction after the March policy meeting. If German inflation returns back below 2.0% today, it might reinforce the euro correction
The Sunrise Headlines
- US stock markets ended mixed yesterday with the S&P 500 and Nasdaq, unlike the Dow Jones, overcoming early weakness to close slightly positive. Overnight, most Asian stock markets lose ground with China underperforming (-1%)
- The Fed may raise rates three more times in 2017 said Boston Fed Rosengren and SF Fed Williams. "An increase at every other FOMC meeting over the course of this year could and should be" the default starting in June, Rosengren said. Stock market valuations "may be a little frothy" in terms of anticipated stimulus, Williams added.
- The White House has not abandoned hope that Congress could make another effort to pass healthcare legislation that Trump administration officials believe would ease resistance to enacting tax reform.
- US crude inventories climbed less than analysts predicted last week, while gasoline stocks narrowed sharply, lifting oil prices above $52.5/barrel for Brent crude.
- South Africa’s ruling ANC party is split at the top over whether FM Gordhan should be sacked, sources said. The rift at the top comes amid party divisions over the finance ministers plans to rein in spending as the economy stagnates,
- Margin debt climbed to a record high in February, a fresh sign of bullishness for flummoxed investors trying to navigate the political and economic crosscurrents driving markets.
- Today’s eco calendar contains EMU confidence data, German CPI, US weekly jobless claims and the final US Q4 GDP reading. Several Fed and ECB members are scheduled to speak and Italy sells bonds. The CNB has a policy meeting
Currencies: Dollar Rebounds After Exceptionally Strong US Consumer Confidence
EUR/USD topside rejected as ECB speculation eases
EUR/USD declined further below 1.08 yesterday. The move was inspired by rumours that the ECB has become reluctant to change the language of its policy statement after the hawkish reaction to the March communication. Declining EMU yields rather than outright USD strength drove EUR/USD trading. USD/JPY traded sideways to slightly lower even as US equities traded with a positive bias as Fed speakers talked rather hawkish. EUR/USD finished the session at 1.0766 (from 1.0814 on Tuesday). USD/JPY closed the day at 111.04 (from 111.15).
Overnight, Asian equities mostly show modest to moderate losses even as US indices held near record high levels. USD/JPY struggles to extend its rebound off the recent lows which weighs on Japanese equities. End of quarter/fiscal year caution of Japanese investors is probably a factor for behind the recent mediocre performance of USD/JPY. The pair tried to regain further ground early in the session, but for now the move has no strong legs. The dollar remains well bid against a weak euro. EUR/USD trades in the 1.0750 area, holding near yesterday’s correction low.
Today’s eco calendar is better filled. The economic confidence data from the EC will probably be solid given the recent evidence from other regional data. The first estimate of the German March CPI is interesting. Headline HICP is expected to rise 0.5% M/M, but might result in a decline of the Y/Y reading from 2.2% to 1.9%. The move is due to base effects. However, markets realizing that German/EMU CPI probably won’t sustain north of 2.0% in the near future, might cause a softer position on the interest rate markets. It could also put some further pressure on the euro short-term. US jobless claims ticked somewhat higher of late but are expected to return to 247.000 from 261 000. If so, the report can be considered as confirming a healthy US labour market. There are again several Fed members scheduled to speak, but we expect them to confirm the scenario of at least two additional rate hikes.
The dollar changed course on Tuesday. The US reflation trade regained momentum after a very strong US consumer confidence. Yesterday, the euro faced headwinds as market rumours questioned the scenario of early ECB policy normalization.
The debate will probably resurface, but for now, it looks that the relative policy divergence between the Fed and the ECB turned again in favour of the dollar, at least short-term. The topside of EUR/USD looks again better protected. A cautious EUR/USD sell-on-upticks approach can be reconsidered. At the same time, the picture of USD/JPY is not really convincing. Will this change when Japanese investors enter a new fiscal year next week?
From a technical point of view, the picture of USD/JPY remains fragile as it dropped below 111.60/36 support. Next support kicks in at 108.84 (50% retracement of the MT up-move). EUR/USD extensively tested 1.0829/1.0874 resistance, but the test was rejected. 1.0906 now looks a solid resistance. EUR/USD might return lower in the previous 1.0875/1.05 trading range.
EUR/USD: test of 1.0874 resistance rejected, at least for now
Sterling ignores May triggering article 50
The UK finally triggered article 50 of the Lisbon treaty, starting the official procedure to leave the EU in two years’ time. Sterling was quite aggressively sold in (thin) Asian markets, but rebounded going into the official Brexitannouncement. The statement of Theresa May and the first answer of EU’s Tusk were quite conciliatory. EUR/GBP filled bids in the 0.8625 area after the Brexitstatements, but regained some ground afterward. We are reluctant to make a direct link between the Brexit-communication and the performance of sterling. Euro weakness also played a role. EUR/GBP closed the session at 0.8658 (from 0.8685). The swings in cable were more modest. Sterling traded soft against the dollar (1.2434 close).
Toda, there are no important eco data in the UK. Yesterday’s exchange of official notes between the UK and the EMU was rather reconciliatory, but it didn’t contain real clues for sterling trading. There might be some Brexit radio silence short-term. We don’t see a clear trend for sterling trading until the next concrete steps in the Brexit-process are taken.
Two weeks ago, sterling found a better bid after the early March decline. Some time ago, EUR/GBP cleared 0.8592 resistance, improving the MT technical picture. However, (substantially) higher than expected UK inflation probably put a decent floor for sterling short-term. We changed our short-term bias on EUR/GBP from positive to neutral. Further consolidation in the 0.85/0.88 area might be on the cards. Longer term, Brexit-complications remain a potential negative for sterling. We are not convinced that the BoE will raise rates anytime soon, even not after this months’ higher inflation data
EUR/GBP: no negative impact from the Brexit announcement on sterling (yet).