'Traders tracking the US Dollar Basket should note that the Index is again trending higher after a short retracement last week.' - Walker England, Daily FX

Pair's Outlook

The common European currency did not stop its major fall against the US Dollar on Tuesday, as the currency exchange rate continued the decline into Wednesday's trading session. Previously, on Tuesday the pair fell down to the weekly S1 at 1.0529, which managed to hinder the fall of the rate. However, on early Wednesday morning the pair passed the support level and began to move further lower. The closest support level to the currency exchange pair is at 1.0488, where the monthly S1 is located at. Due to that it is most likely that the rate will surely fall below the 1.05 mark.

Traders' Sentiment

SWFX traders are firmly bullish on the pair, as 54% of open positions are long. In the meantime, 55% of set up orders are to sell the Euro

'The recent negative undertone has eased with the sharp bounce and this pair has likely moved into a 1.2400/1.2580 consolidation range. In other words, the overall neutral phase that started earlier this month is still intact.' – UOB Group (based on FXStreet)

Pair's Outlook

Despite strong downside volatility, the GBP/USD pair managed to recover from its intraday low and even close trade in the green zone. The Cable now faces the 1.25 resistance, which is bolstered by the 20-day SMA and the weekly R1. However, a breach of this area does not ensure further bullish momentum is to follow; for that the Sterling is required to climb over the 1.2540 level, as that would slightly reassure the current three-week down-trend is to come to an end. A strong support area just above 1.24 is likely to help the British currency remain afloat, as it has been doing for a whole a month now.

Traders' Sentiment

There are 58% of traders being long the Pound today, compared to 59% on Tuesday. At the same time, the share of sell orders returned to its Monday's level of 55% (down from 58% previously).

'I don't feel there was incentive-backed selling [of the dollar].' – Kenji Yoshii, Mizuho Securities (based on Market Watch)

Pair's Outlook

The USD/JPY currency pair successfully climbed over the immediate resistance area on Tuesday, but was unable to reach the 114.00 major level. The main target is the 115.00 mark, with an interim resistance lying on the pair's path around 114.40, represented by the weekly R1 and the monthly PP, which could prevent the Buck from reaching its goal. However, a strong impetus is required for a surge beyond 115.00, otherwise the consolidation trend is to be maintained. Today's FOMC Minutes could provide such a boost for the Greenback, but lately this particular event has been failing to strengthen the US currency substantially.

Traders' Sentiment

Bulls are barely outnumbering the bears, as 52% of all open positions are long. The portion of buy orders surged from 38 to 63% in 24 hours.

'We are relatively agnostic on the outlook for gold, with our 3-, 6-, and 12-month targets at $1,200, $1,200 and $1,250 an ounce respectively.' – Goldman Sachs (based on Reuters)

Pair's Outlook

The yellow metal remained near the 1,235 level for the fifth consecutive trading session during the early hours of Wednesday's trading session. However, during Tuesday's trading the bullions price increased its volatility to the downside, as the commodity price once more confirmed the uptrend line at 1,226.12. The bullion seems to have formed a short term triangle, as there is another trend line, which together with the uptrend line forms a triangle pattern. Although, for the clues regarding the direction of the upcoming break out market participants need to look at fundamental data coming out from the Federal Reserve.

Traders' Sentiment

SWFX traders remain bullish regarding the bullion, as 55% of open positions are long on Wednesday. Meanwhile, 63% of trader set up orders are to buy the metal.

'The eurozone economy moved up a gear in February. The rise in the flash PMI to its highest since April 2011 means that GDP growth of 0.6% could be seen in the first quarter if this pace of expansion is sustained into March.' - Chris Williamson, IHS Markit

Data released on Tuesday showed economic activity in the Euro zone perked up over the month of February, nearing a six-year high. The Markit flash PMI for the shared currency area hit the highest level in 70 months, surging to 56.0 in February from 54.4 registered in the preceding month and beating analysts' expectations for a 54.3 reading. Sufficient growth was registered in both services and manufacturing, with expansion in the latter sector outpacing services growth rate. More specifically, the manufacturing PMI climbed to 55.5 over the course of February compared with the previously reported 55.2, while experts penciled in a reading of 55.0. For the services industry, the purchasing managers' index rose to 55.6, up from 53.7 observed in January. The gain came in ahead of market expectations for the index to stay unchanged from the previous month. Separately, Germany and France released their business activity figures, with the composite PMIs in the abovementioned countries jumping to 56.2 and 56.1 respectively. Elsewhere in the common currency area, economic activity growth rate peaked to a 14-month high.

'The weak result was mainly due to a change in the way that the ONS measures corporation tax revenue.' - Scott Bowman, Capital Economics

Britain's public sector budget surplus expanded less than expected in January, official figures revealed on Tuesday. According to the Office for National Statistics, the UK public sector's net borrowing, which excludes state-owned banks, registered a budget surplus increase to £9.4B in the first month of 2017, the highest figure since 2000, compared to the £9.1B a year ago. Nonetheless, the January surplus growth was worse than analysts' expectations for a £14.7B hike. Moreover, borrowing requirements for the first 10 months of 2016-2017 fiscal year decreased to £49.3B from £62.9B. That was the lowest 10-month budget deficit in nearly nine years. Furthermore, the ONS said net debt rose to 85.3% of GDP from 83.4% recorded in the preceding year. Due to certain changes in methodology of the latest data release, the report also revealed there was a £2.1B transfer from the BoE Asset Purchase Facility Fund. Overall, the confidence in the near-term budget outlook is likely to appreciate due to solid revenue growth.

Separately, the BoE Governor Mark Carney, speaking on the February inflation report, pointed out that inflation is entirely affected by the currency, while rates are set to rise more quickly than expected.

Sunrise Market Commentary

• Rates: Bund resistance should hold, underperformance US Treasuries?
  Risks for the German IFO are on the upside of expectations which should keep the Bund below key resistance (164.90). EMU markets remain sensitive to French election news, which is a wildcard. The FOMC Minutes aren't expected to reveal much new info after last week's Yellen testimony. We nevertheless think that US Treasuries will underperform Bunds.
• Currencies: EUR/GBP tests 0.8450 support
  The dollar remains in the drivers' seat as the reflation trade continues. EUR/USD tests the short-lows in the low 1.05 area, but this decline is also for an important part due to euro weakness. For now, this pattern might continue. Euro weakness also pushes EUR/GBP for a new test of the 0.8450 support area.

The Sunrise Headlines

• US stock markets extended their record race, gaining more than 0.5% after Monday's public holiday. Overnight, Asian equity sentiment is less bullish, with most indices recording small gains.
• Shares in Fannie Mae and Freddie Max tumbled by more than a third on after a court struck a blow to a group of investors in their quest to overturn the government's decision to take all of the US mortgage giants' profits
• China home prices increased last month in the fewest cities in a year, signalling property curbs to deflate a potential housing bubble are taking effect. New home prices, excl. subsidized housing, gained last month in 45 of the 70 cities
• BoJ Governor Kuroda said the chance the central bank will deepen negative interest rates is low for now, backing market expectations that no additional monetary easing is forthcoming in the near future.
• The head of Australia's central bank, Lowe, gave the clearest signal yet that further cuts in interest rates would not be in the national interest as the danger of a debt-fuelled boom and bust was just too severe.
• Political uncertainty is slowing trade growth, a World Bank report has concluded, indicating that the rise of Donald Trump may already be casting a shadow over the global economy.
• Cleveland Fed Mester said policy makers don't want to surprise the market on interest rates and they have to be “nimble” to adjust their outlook amid global and domestic risks.
• Today's eco calendar contains German IFO, the second reading of UK Q2 GDP, finale EMU CPI data, US existing home sales and FOMC Minutes. Fed Powell speaks on the economic outlook and Germany and the US tap the market

Currencies: EUR/GBP Tests 0.8450 Support

By default' USD buying continues

EMU PMI's were stronger than expected yesterday. Core (German and US) yields and equities rose after the PMI release, but didn't help the euro. France remained a euro negative and the resumption of the reflation trade supported the dollar. The rally slowed later in the session as US bond yields softened. Even so, the US currency still closed the session with decent gains. EUR/USD closed the session at 1.0536 (from the 1.0614) area. USD/JPY finished the day at 113.68 (from 113.10).

Overnight, most Asian equities indices follow the rally from the US yesterday. Japanese equities struggle to avoid loses as USD/JPY lost modest ground. In a speech in Singapore, Fed Mester sounded a bit dovish as she said that the Fed doesn't want to surprise markets on interest rates. The dollar, especially USD/JPY, softened a bit. At the same time, US bond yields maintain a slightly upward bias. So, there is again a slight discrepancy across markets. USD/JPY is trading near 113.50. EUR/USD changes hands in the 1.0525 area. RBA's Lowe warned on the debt load of Australian households. At the margin, the risk of too high debt might make the RBA cautions to cut rates further. AUD/USD rises slightly overnight, currently trading in the 0.7690 area.

Today, the German IFO is expected slightly softer at 109.6 (from 109.8). After strong German PMI's, an upward surprise is possible. In the US, the Minutes of the January FOMC meeting are in focus. They probably won't give us new insight in the timing of the next rate hike. However, since the meeting, economic data have been very strong and inflation surprised on the upside. Yellen was more hawkish at the testimony before Congress as she said “it would be unwise to wait too long before tightening”. Several governors pointed to the possibility of a March rate hike. A slightly hawkish tone in the Minutes shouldn't come as a surprise. Over the previous days, French election worries fuelled uncertainty on European markets (French spread widening). It weighed on the euro and supported USD/EUR gains, as the global/US reflation trade continues. Call it by default USD buying/euro selling. USD/JPY underperformed the USD/EUR gains. The political uncertainty in Europe will continue to play its role. At the same time, the focus in the US will turn to Trump's fiscal plan and Fed comments. The combination of both factors suggests further USD buying against a weak euro. We maintain a more cautious bias on USD/JPY. Selling pressure from EUR/JPY might continue to weigh.

Global context. The dollar corrected lower since the start of January as the Trump reflation trade slowed down. Two weeks ago, the dollar bottomed out, supported by Trump's tax promise. Underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and favour a sell EUR/USD on upticks approach. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains a key support. The comments of Yellen before Congress (and of other Fed members) were USD supportive, but had little lasting impact on yields. We keep a cautious USD positive bias, but remain more cautious on the upside potential of USD/JPY compared to USD/EUR.

EUR/USD: testing recent low on euro softness and USD strength

EUR/GBP

EUR/GBP sliding below 0.8450 support.

Yesterday, sterling gained ground against an overall weak euro, but stabilized against broadly strong dollar. At a hearing before Parliament, BoE's Carney defended the assessment of the February inflation report. The central bank raised its growth forecast, but kept its inflation forecast unchanged as the BoE said that unemployment could decline further before wages rise. Some BoE governors disputed Carney's assessment. Even so, sterling remained well bid. Especially, EUR/GBP was pressured by the decline of EUR/USD. The pair closed the session at 0.8448, testing the key 0.8450 support. Cable close the session at 1.2474 (from 1.2463).

Overnight, EUR/GBP is extending its test beyond the 0.8450 support. Euro weakness remains the driver. The first stage of the Brexit debate in the House of Lords didn't bring any new roadblocks for PM May. The nest step is scheduled for early next week. The risk-on context is also a ST sterling supportive. Later today, the details of the UK GDP Q4 GDP will be published. A confirmation of the 0.6% Q/Q and 2.2% Y/Y growth is expected. We don't expect a lasting impact on sterling trading. EUR/GBP recently hovered in a tight range north of the 0.8450 support. Sterling sentiment softened slightly as the market feels that a BoE rate hike is still very far away. At the same time, euro softness weighed on EUR/GBP.

Longer term, we have a sterling negative view as the Brexit still has to (negatively) impact the UK economy. However, this is no issue at this stage. Euro weakness prevails. A sustained break below the 0.8450 might trigger additional stop-loss selling. The EUR/GBP 0.8304 correction low is the next key support.

EUR/GBP: 0.8450 support again under (heavy) pressure

Download entire Sunrise Market Commentary

GBPUSD has made five waves up from January low which we see it as an impulsive wave up in wave 1, followed by a recent corrective move that we see it as a double zig-zag pattern in wave 2. At the moment we see price trading higher, around the 1.2494 level, out of a probable minor triangle correction, which was found in wave Y). If that is the case and price really did unfold a triangle correction, then we can expect more strength to follow on the pair. That said, but if price continues to drop from current levels, then we could be trading within a more complex blue wave 2.

GBPUSD, 4H

Market movers today

In the US, the FOMC minutes from the February meeting are due out. The statement did not contain much interesting news but the minutes may enlighten us on the different stances within the FOMC. We do not expect much news from the minutes either as the Fed is waiting for more news on Trumponomics. In addition, Fed Governor Jerome Powell (voter, neutral) is due to speak tonight on the economic outlook and monetary policy.

German Ifo expectations fell from 105.5 in December to 103.2 in January and we expect it to decrease further in February to 102.5. Despite the high level in the survey in Q4 16, pointing towards very strong German GDP growth, actual economic activity was ‘just' 0.4% q/q in the first release. Overall, optimism about growth prospects for the start of 2017 could be on the decline.

In the UK, the second estimate for GDP growth in Q4 is due out, which is somewhat interesting, as the expenditure components such as private consumption and investments in Q4 are included for the first time in this release. While growth continued at the same pace in H2 16 after the EU vote, we think GDP growth will slow down eventually this year.

In Scandinavia, Norwegian LFS-unemployment data for December (November-January) will be published this morning, while the Swedish Debt Office will release its updated borrowing forecast. For more info see ‘Scandi Markets' on page 2.

Selected market news

US equity markets closed at a new record high last night as US investors returned to the market after Monday's holiday. In Asia, risk appetite appears more moderate this morning with mixed trading in the regional equity indices.

The oil price moved higher yesterday and the price on Brent crude topped the USD57/bbl level for the first since the beginning of the month. Constructive risk sentiment during the European session and bullish comments from OPEC Secretary General Mohammad Barkindo contributed to the move higher. The higher oil price was a supporting factor the currencies of oil producing countries like the rouble and the Norwegian krone and EUR/NOK broke below the important technical level of 8.83-8.84 from the beginning of February, which may open up for further downside.

In the UK, lawmakers in the House of Lords agreed without a vote last night, after two days debate, to let the government's Brexit move on to the ‘committee stage' starting on 27 February. Here, lawmakers will consider amendments and we are likely to see attempts to rewrite the bill. The government does not have a majority in the Upper House and could potentially lose votes on amendments. If wording in the bill is changed by the Upper House, it will be sent back to the Lower House (House of Commons) for another debate and voting.

Data for Chinese property prices, released overnight, showed that house prices increased in January in the fewest cities in a year. New home prices, excluding government-subsidised housing, gained last month in 45 of the 70 cities tracked by the National Bureau of Statistics. Moreover, in the cities where house prices still go up, it seems that price inflation is moderating, indicating that recent tightening measures have worked to dampen house price inflation.

Currency pair EUR/USD

The EUR/USD is at the 100% Fibonacci level of wave X (blue) which could be a bouncing zone if price is building a complex WXY correction within a larger wave 2 (puple). A break below the 138.2% Fib level invalidates wave X (blue). The Fibonacci levels of wave 2 (purple) could also act as reversal spot and remains valid unless price breaks above the 100% level of wave 2 vs 1 (purple).

The EUR/USD could be complete a bearish ABC (green) within wave X (blue). A break above the resistance trend line (red) confirms a larger wave 2 (purple) correction whereas a break below the channel (green) could price test the lower Fib levels.

Currency pair GBP/USD

The GBP/USD finally seems to be breaking the contracting triangle chart pattern. A 4 hour candle is breaking above the resistance trend line (dotted red) which indicates that the triangle was a bearish correction. Price could potentially retest the larger resistance trend line (brown) as part of wave C (blue).

The GBP/USD finally seems to be breaking the contracting triangle chart pattern. A 4 hour candle is breaking above the resistance trend line (dotted red) which indicates that the triangle was a bearish correction. Price could potentially retest the larger resistance trend line (brown) as part of wave C (blue).

Currency pair USD/JPY

The USD/JPY is most likely building a wave 1-2 (blue) structure unless break below the 100% level of wave 2 vs 1. A breakout above resistance (red) and the round 115 psychological level could confirm and start wave 3 (blue). Wave 2 (blue) could expand potentially into a larger correction as well (see 1 hour chart) but should typically last between 100% and 161.8% of wave 1 (see bottom scale).

The USD/JPY could be completing a bearish ABC (brown) zigzag within wave 2 (blue). A break above the red line invalidates wave B (brown). There could be another ABC zigzag (orange) within wave that wave B (brown).