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Sunrise Market Commentary

• Rates: Core bond sell-off to slow with key yield resistance levels looming?
  US investors return from the long weekend, but they don't have much catching up to do. Only hawkish comments from ECB Hansson inflicted some Bund losses towards the end of European dealings. Today's eco calendar probably won't impact trading. Risk sentiment on stock markets and technical factors (looming resistance in yields) are the main considerations.
• Currencies: Dollar decline slows, but no sign of a sustained U-turn yet.
  Yesterday, the EUR/USD rally continued after Friday's break above a key resistance area. US investors return from a long weekend. The eco calendar probably provides no high profile trigger for a trend reversal on the FX market. Even so, USD/JPY showed a cautious rebound this morning. The focus for sterling trading turns to the UK price data

The Sunrise Headlines

• US stock markets were closed yesterday because of Martin Luther King Day. Asian stock market sentiment is positive overnight with Japan and China outperforming.
• The ECB should adjust its policy guidance before the summer and shouldn't have any problems ending net asset purchases in one swoop after September, Governing Council member Hansson said.
• Japanese Finance Minister Aso said that he did not see problems with USD/JPY weakening to around 110.80 yen, but that big swings in currencies would be problematic.
• The EU has toughened up its conditions for a post-Brexit transition deal for the UK, demanding that Britain abide by stricter terms on immigration, external trade agreements and fishing rights for nearly two years after it leaves the bloc.
• Greek lawmakers approved an omnibus package of labour, energy and fiscal reforms needed to wrap up the penultimate review of its €86bn bailout, as police clashed with leftwing demonstrators outside the parliament building.
• Republican congressional leaders don't believe they have the time to complete a fiscal year spending deal by Friday, according to a person familiar with the talks. They are weighing legislation for a short-term extension until Feb. 16.
• Today's eco calendar contains UK inflation data (Dec) and US empire manufacturing (Jan). The Belgian debt agency is expected to launch a new 10-yr bond (OLO 85 Jun2028) by syndication

Currencies: Dollar Decline Slows, But No Sign Of A Sustained U-Turn Yet

Dollar decline slows, but no U-turn yet

Last week's trends in the dollar and the euro continued yesterday even as US markets were closed (Martin Luther King Day). EUR/USD made further followthrough gains after Friday's break above 1.2092/1.2167, reaching a 3 year top. There was little news. Investors continued adjusting as the December minutes indicated that the ECB will probably soon prepare markets for a gradual scaling back of policy stimulation. Euro strength coincided with broader USD weakness. USD/JPY also declined further on optimistic comments of BOJ Kuroda. EUR/USD came close to 1.23 and finished the day at 1.2264. USD/JPY closed at 110.54.

Overnight, Asian markets continue the risk rally with Australia and India underperforming. Japan Fin Min Aso said that the current USD/JPY level is no problem but warned on sudden FX-moves. USD/JPY returned to the high 110 area. EUR/USD stabilizes in the 1.2265 area. ECB's Hanson indicated that the ECB could change guidance before Summer and that it could end asset purchases in one step in September. The Yuan (USD/CNY 6.43) trades near the strongest level in 2-years. Later today, the calendar is again thin with the final German CPI and the US Empire manufacturing survey. The Empire survey is expected slightly higher at 19.0. Recent US sentiment indicators were mixed, despite the approval of the tax reform. The report will only be of intraday significance.

Global Picture. Euro strength still prevails as markets prepare for a change in policy from major central banks outside the US, including the ECB and even the BOJ. Especially the ECB is signalling a gradual turn. Looking at the fundamentals/interest rate differentials (2-y US/German spread at +250 bps), the euro rise/dollar decline has gone quite far. However, there is no trigger for a ST change in sentiment. The technicals turned USD negative as EUR/USD cleared 1.2090/1.2167 resistance. The dollar is a failing knife and there is no sign of a reversal. 1.2598 (62% Retracement) is next important resistance on the charts.

Sterling traded resilient of late, supported by hope that the EU could turn less hard in the Brexit negotiations. Today, the focus turns to the UK price data. Headline and core CPI are expected to decline slightly to respectively 3.0% Y/Y and 2.6% Y/Y. A scenario of a gradual easing of inflation might convince markets that little additional BoE action is needed anytime soon. Short term sterling sentiment was constructive of late, but we expect EUR/GBP 0.8700/60 to be a solid support.

EUR/USD holds near recent top. Euro strength/USD softness persist for now.

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Currency pair EUR/USD

The EUR/USD bullish breakout within the uptrend is now building a sideways retracement. The consolidation zone is most likely just a correction before the bullish trend continues towards the Fibonacci targets of wave 5 (blue).

The EUR/USD bullish impulsive price action is best explained by the development of a wave 3 (orange). The shallow correctionis probably a wave 4 (orange) which could either retrace to the Fib levels or break above the resistance (red).

Currency pair GBP/USD

The GBP/USDis showing a strong bullish rally after the breakout. Price is now approaching a key resistance zone which is indicated by the resistance trend line (orange). The orange horizontal line is the bottom of wave 1 on a weekly chart and a break above it indicates an invalidation of a long-term bearish wave count.

The GBP/USD bullishmomentum is best explained by a wave 3 (grey) and a retracement is most likely a wave 4 (grey) if price behaves slowly and correctively.

Currency pair USD/JPY

The USD/JPY downtrend is challenging the resistance trend line (red). A bearish bounce could indicate a continuation towards the -61.8% Fibonacci target at 110.

The USD/JPY is testing the resistance trend line (red) of the downtrend. A bullish break could indicate a reversal and continuation of the bullish momentum.

The greenback's sell-off paused early Tuesday after touching its weakest level since January 2015. Traders have been selling the buck across the board since Monday even though U.S. markets were closed for Martin Luther King Day. This suggests that growing optimism about global economic growth will sooner than later force major central banks to unwind their easy monetary policies.

Apparently, it's not the U.S. data driving the dollar. If this was the case, last week's core CPI and retail sales figures should have supported the currency. In fact, traders have become aggressive sellers of the dollar with short positions, reaching $9.2 billion a week ago according to Commodity Futures Trading Commission's weekly Commitments of Traders (COT). Given that sentiments have become the key driver of FX flows, the downtrend in the U.S. dollar may continue in the short run.

The question that may come to traders' minds, is how much further will policymakers allow their currency exchanges to appreciate against the dollar? Earlier today Japanese Finance Minister Taro Aso commented that he did not see problems with the USDJPY hovering around 110.80 yen. However, he admitted that big swings in currencies would be problematic. Yesterday's Eurozone trade balance showed that despite the strong Euro, trade surplus rose to its highest levels in eight months, suggesting that the stronger Euro, isn't becoming a headache to European companies yet.

Comments from ECB's governing council member Adro Hansson yesterday, suggested that the bond-buying program could end entirely in September, if the data warranted. So, I believe inflation figures in the next three months will be a key metric to determine whether the ECB will put an end to stimulus.

Sterling, which also benefited from the bearish sentiment surrounding the dollar, climbed above 1.38 for the first time since the Brexit vote. Progress on Brexit negotiations have been a significant driver for the pound, but given that we're still in the early stages of the second round of talks, expect to see some volatility in the pound. Focus today will turn to U.K. data, particularly the CPI release. We expect that inflation will have fallen by 0.1% in December from 3.1% in November. However, a fall of more than 0.2% will likely lead to some profit taking in GBPUSD.

USDJPY found support ahead of 110.000 yesterday, with a low of 110.330. The area is a key psychological support for the pair finding buyers to reverse the recent bout of selling. A drop below the 110.000 level has prompted intervention from authorities in the past, as the countries’ Equities Indices come under pressure from the exchange rate.

UK MPC Member Teneyro gave a speech entitled ‘The Fall in Productivity Growth: Causes and Implications’ at the Queen Mary University of London on Monday evening. She said that there was ample time before BOE would need to change rates again. She expects a couple of more rate hikes over the next three years if the economy performs as expected. Productivity risks might be skewed to the upside. She also made the comment that there are huge problems with the way GDP is measured and that it is unclear how productive self-employed workers are.

Eurozone Trade Balance n.s.a. (Nov) was released with the number coming in at €26.3B. The expected number was €28.2B from €18.9B prior. Eurozone Trade Balance s.a. (Nov) was €22.5B v an expected €22.3B, from €19.0B previously. EURUSD moved higher from 1.22600 to 1.22963 after the data was released.

New Zealand NZIER Business Confidence (QoQ) (Q4) was in at -12% from 5% previously. Also released was Electronic Card Retail Sales (MoM) (Dec) coming in as expected at 0.5, from 1.2% previously, that was revised up to 1.3%. Electronic Card Retail Sales (YoY) (Dec) were 3.3% v a prior reading of 4.3%.

Japanese All Industry Activity Index (MoM)(Nov) was 1.1% v 0.4% expected, from 0.3% previously, which was revised down to 0.2%. USDJPY moved higher from 110.695 to 110.934 following the data release.

EURUSD is up 0.05% overnight, trading around 1.22693.

USDJPY is up 0.27% in early session trading at around 110.819.

GBPUSD is up 0.03% to trade around 1.37939.

USDCAD is down -0.02%, trading around 1.24253.

Gold is up 0.06% in early morning trading at around $1,340.39.

WTI is down -0.39% this morning, trading around $64.41.

Major data releases for today:

At 07:00, German Harmonised Index of Consumer Prices (YoY) (Dec) will be released. The consensus is for an unchanged value of 1.6%. Wholesale Price Index (MoM) (Dec) is expected to be 0.3% from 0.5% previously. Wholesale Price Index (YoY) (Dec) was 3.3% previously. EUR pairs may have positions opened or closed due to this data.

At 09:30 GMT, UK Consumer Price Index (YoY) (Dec) is expected out at 3.2% v 3.1% previously. Core Consumer Price Index (YoY) (Dec) is expected unchanged at 2.7%. Consumer Price Index (MoM) (Dec) is expected at 0.6% from 0.3% prior. Producer Price Index – Output (MoM) n.s.a. (Dec) is expected at 0.1% from 0.3% previously. Producer Price Index – Output (YoY) n.s.a. (Dec) is expected at 2.8% from 3.0% previously. Producer Price Index – Input (MoM) n.s.a. (Dec) is expected at 0.5% from 1.8% previously. Producer Price Index – Input (YoY) n.s.a. (Dec) is expected at 6.0% from 7.3% previously. PPI Core Output (MoM) n.s.a. (Dec) is expected at 0.1% from 0.2% previously. PPI Core Output (YoY) n.s.a. (Dec) is expected at 2.1% from 2.2% previously. GBP crosses could be moved by the data released at this time.

At 17:00 GMT, SNB Chairman Jordan will speak at the University of Zurich in a speech titled ‘How money is created by the central bank and the banking system.’ His comments could move CHF crosses.

At 23.30 GMT, Australian Westpac Consumer Confidence (Jan) will be released. The previous reading was 3.6%. This release can affect AUD pairs.

At 23:50, Japanese Machinery Orders (YoY) (Nov) will be released with a consensus of -0.7% expected from 2.3% prior. Machinery Orders (MoM) (Nov) will be released with a consensus of -1.4% expected from 5.0% previously.

Daily Pivots: (S1) 151.98; (P) 152.39; (R1) 152.86; More...

Intraday bias in GBP/JPY remains neutral at this point. On the upside, break of 153.66 will resume medium term up trend. Meanwhile, break of 149.40 support will indicate trend reversal and turn focus to 149.96 for confirmation.

In the bigger picture, considering bearish divergence condition in daily MACD, the steep fall from 153.66 is now seen as first sign of trend reversal. Focus will turn to 146.96 support. Firm break there will at least confirm medium term topping and target 139.39 support next.

Daily Pivots: (S1) 135.05; (P) 135.51; (R1) 136.02; More....

Intraday bias in EUR/JPY remains neutral at this point. outlook stays bullish and further rally is in favor. Break of 136.63 will resume medium term up trend. However, below 133.03 will turn focus to 132.04. Firm break there will indicate medium term reversal.

In the bigger picture, medium term rise from 109.03 (2016 low) is seen as at the same degree as the down trend from 149.76 (2014 high) to 109.03 (2016 low). It should be targeting 141.04/149.76 resistance zone. On the downside, break of 132.04 support is needed to indicate medium term reversal. Otherwise, outlook will stay bullish in case of deep pull back.

Daily Pivots: (S1) 1.5351; (P) 1.5396; (R1) 1.5440; More....

Intraday bias in EUR/AUD is mildly on the upside for the moment. A short term bottom was formed at 1.5153 on bullish convergence condition in 4 hour MACD. Further rise would be seen back to retest 1.5770 high. On the downside, break of 1.5153 will resume the fall from 1.5770 to 1.4949 cluster support (38.2% retracement of 1.3624 to 1.5770 at 1.4950).

In the bigger picture, decline from 1.5770 just breached 1.5226 key support briefly and recovered. The development is reviving the bullish case that rise from 1.3624 is still in progress. But considering bearish divergence condition in daily MACD, we'd prefer to see firm break of 1.5770 resistance to confirm. On the downside, sustained trading below 55 week EMA (now at 1.4950) will likely bring retest of 1.3624 support. Overall, there is still prospect of another medium term rally as long as 61.8% retracement of 1.1602 to 1.6587 at 1.3506 holds.

Daily Pivots: (S1) 0.8871; (P) 0.8890; (R1) 0.8908; More...

No change in EUR/GBP's outlook. Despite the rally attempt, upside momentum remains unconvincing. Break of 0.8981 resistance is needed to indicate completion of the decline from 0.9305. Otherwise, another fall would be mildly in favor. Below 0.8808 support will turn bias to the downside for 0.8688 support first.

In the bigger picture, there are various ways to interpret price actions from 0.9304 high. But after all, firm break of 0.9304/5 is needed to confirm up trend resumption. Otherwise, range trading will continue with risk of deeper fall. And in that case, EUR/GBP could have a retest on 0.8303. But we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside.

Daily Pivots: (S1) 1.1782; (P) 1.1807; (R1) 1.1832; More...

EUR/CHF's medium term rally is still in progress and is heading towards 1.2 handle. At this point, considering relatively weak upside momentum as seen in daily MACD we'd still expect strong resistance below 1.2 handle to limit upside and bring medium term reversal. But break of 1.1683 support is needed to indicate short term topping first. Otherwise, outlook will remain mildly bullish in case of retreat.

In the bigger picture, while a medium term top could be around the corner, there is no change in the larger outlook. That is, long term rise from SNB spike low back in 2015 is still in progress and would extend. As long as 1.1198 resistance turned support holds, we'll hold on to this bullish view and expect another to prior SNB imposed floor at 1.2000. Though, we'll reassess the outlook if 1.1198 is firmly taken out.

SPX Short Term Elliott Wave view suggests that rally from 12/2/2017 low is unfolding as 5 waves impulsive Elliott Wave structure where Minute wave ((i)) ended at 2694.97, Minute wave ((ii)) ended at 2673.61, Minute wave ((iii)) ended at 2759.14, and Minute wave ((iv)) ended at 2736.06. Internal of Minute wave ((v)) is unfolding also as 5 waves impulsive Elliott Wave Structure where Minute wave (i) ended at 2750.80, Minute wave (ii) ended at 2743.31, and Minute wave (iii) is in progress. We don’t like selling the Index and expect the Index to extend higher within Minute wave ((v)) provided pivot at 1/10 low (2736.06), and more importantly pivot at 12/30/2017 low (2674) stays intact.

SPX 1 Hour Elliott Wave Chart