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Rates: Event risk looms large, supporting core bonds?

The German Bund and US Note future could extend gains at the start of the week as a rift between the CDU and CSU on migration risks overthrowing the government. The US/Chinese trade spat intensified as well. The ECB's conference in Sintra will draw a lot of attention later this week.

Currencies: Trade tensions and German political risk to weigh on the euro?

The post-ECB decline of the euro slowed down on Friday. There are few eco data today. Trade tensions and political uncertainty in Germany are potential event risks for markets at the start of the new week. Both factors might be intrinsically negative for the euro. A retest of the 1.1510 correction low remains possible.

The Sunrise Headlines

• The US equity markets closed with losses on Friday with no real outliers. The Asian markets continued this market sentiment with opening in red on Monday. The NIKKEI is underperforming by opening with 0.82% lower.
• China will retaliate against the new US tariffs on $50bn in Chinese imports. In response it will impose 25 per cent tariffs on $34bn of US imports targeting agriculture and auto-industry and threatens to add an additional $16bn later.
• Brexit uncertainties, high oil prices and fears of a trade war is causing the UK's economy to grow this year at its weakest rate since 2009. The BCC revised its growth forecast for 2018 downwards to 1.3% from 1.4%.
• Angela Merkel is facing her interior minister Horst Seehofer in a stand-off over the treatment of asylum seekers. The disagreement is a threat to the current coalition and should in all cases be avoided with the EU-summit of this month.
• Emmanuel Macron and Angela Merkel are meeting this week to discuss the Eurozone budget. France's finance minister claims solid progress in Franco-German discussions, signalling that a deal this week could be struck.
• This Friday's OPEC meeting is promising to be a chaotic one. Venezuela and Iraq are about to join Iran in blocking a proposal to increase oil output, that was put on the table by Saudi Arabia and Russia.
• Today's economic calendar is relatively empty with only speeches colouring the day. Draghi gives the opening speech of ECB's Forum in Sintra. Atlanta Fed governor Bostic and San Francisco Fed governor Williams are to speak as well.

Currencies: Trade Tensions And German Political Risk To Weigh On The Euro?

Trade and German crisis to weigh on euro?

The decline of EUR/USD calmed down after the euro fell off a cliff as the ECB on Thursday took a much softer approach than the Fed, by cementing rates for more than a year. US eco data were mixed and had only a limited impact on the dollar. The US formally imposed tariffs on $50bn of Chinese imports. The initial market reaction was guarded. USD/JPY held relatively stable and closed the session little changed at 110.66. EUR/USD maintained most of its intraday gain and finished the session at 1.1610.

Chinese markets are closed this morning. Most other regional equities show substantial losses as retaliation from China against the US import tariffs is raising the risk for an outright trade war. USD/JPY dropped temporary to the 110.30 area, but there are no follow-through losses. EUR/USD is losing a few ticks (near 1.1590). Tensions within the German government on migration are a tentative negative for the euro.

The eco calendar is thin today. The market focus might turn to the next developments in the trade war. Until now, the impact of trade tensions on the euro or the dollar was modest. An escalation might hurt Europe/European growth more that the US. However, it is difficult to make a one-to-one link with EUR/USD trading. Political uncertainty in Germany is a potential negative for the euro, too. CB speakers (both from the ECB and the Fed) are a wildcard. However, CB talk will probably confirm policy divergence as it appeared at last week's Fed and ECB meetings. Going into the ECB meeting, we assumed EUR/USD to stay north of the 1.1510 support as we expected the ECB to herald policy normalisation. However, last week's ECB decision signalled that the euro won't get interest rate support soon. We turned again more cautious on the euro. A retest of the EUR/USD 1.1510 support is possible. The dollar can stay strong for longer against the euro. The picture for USD/JPY is more balanced as risk-off sentiment and a high interest rate differential might cancel each other out.

EUR/GBP hovered sideways on Friday, roughly between 0.8720/60. UK retail sales were strong, but the rift on Brexit within the UK government persisted. The Brexit debate returns to the House of Lords today. If the government loses the vote, the Brexit bill will return to the House of Commons as debate on the role of Parliament in Brexit continues. We expect more sideways trading in EUR/GBP in the mid 0.87 area

EUR/USD: euro to stay weak as trade tensions and German political crisis might dominate headlines

Daily Pivots: (S1) 1.3230; (P) 1.3264; (R1) 1.3317; More...

Intraday bias in GBP/USD remains on the downside for 1.3203 low. Break will resume whole decline from 1.4376 and target 50% retracement of 1.1946 to 1.4376 at 1.3161 first, and 61.8% retracement at 1.2875 next. For now, outlook remains bearish as long as 1.3471 resistance holds, in case of recovery.

In the bigger picture, current development suggests that whole medium term rebound from 1.1936 (2016 low) has completed at 1.4376 already, with trend line broken firmly, on bearish divergence condition in daily MACD, after rejection from 55 month EMA (now at 1.4182). 61.8% retracement of 1.1936 (2016 low) to 1.4376 at 1.2874 is the next target. We'll pay attention to the reaction from there to asses the chance of long term down trend resumption. For now, outlook will stay bearish as long as 1.3617 resistance holds, even in case of strong rebound.

Market movers today

There are no tier 1 data releases today, but there will be some focus on speeches by t he Fed's Vice President, Bill Dudley (voter, neutral) and ECB President Mario Draghi in Sintra tonight (19:30 CET).

On top of the US-China trade spat , focus this week will be on euro PMI for June, the Bank of England and the OPEC meetings. See Weekly Focus, 15 June 2018.

There is also a Eurogroup/Ecofin meeting at the end of the week, where Greece is expected to be back on the agenda given that it is set to exit the last bailout programme in August.

In Scandi markets, the Norges Bank meeting will take centre stage and Swedish manufacturing confidence is up for release as well.

On Wednesday, we are due to release our Nordic Outlook with new forecasts for the Nordic countries.

Selected market news

Global trade war concerns have made a comeback. As a response to the US move to levy tariffs on USD50bn of Chinese goods, China said on Friday that it will impose tariffs wit h ‘equal scale, equal intensity' on US imports and cancel its earlier trade commitments. Whereas US tariffs are aimed to curb China's indust rial advancement , Chinese tariffs are primarily aimed at hurt ing the commodity producers of the American heart land. The first wave of 25% tariffs will hit USD34bn in goods and take effect on 6 July, with another USD16bn st ill to be reviewed. Trump pledged more penalt ies if China follows through and we see a high likelihood that he will increase the amount of Chinese imports subject to tariffs to USD15 0bn quite soon.

Financial markets on Friday remained fairly calm in light of the mount ing t rade frict ions. The S&P 500 closed down 0.1%, but t rade-sensit ive sectors including tech hardware and indust rials led decliners. Asian stocks followed US equit ies lower this morning and US stock index futures point to further declines. EUR/USD is still consolidating around the 1.16 level following last week's significant drop on ECB's dovish rate guidance. Oil headed back below USD73/bbl after news emerged that Venezuela and Iraq together with Iran would seek to block a proposal by Russia and Saudi Arabia to increase oil production at this week's OPEC meeting.

In Germany, a disput e in Angela Merkel's coalition over migrat ion policy has swift ly escalat ed into one of the biggest tests of her chancellorship. Whereas Interior Minister Horst Seehofer (CSU) wants to force through a plan to send back migrants at the border who h ave already registered for asylum in other EU states, Merkel rejects the proposal as offloading the burden onto neighbouring states, and says it would endanger efforts to forge an EU-wide response to migrat ion. Merkel has asked the CSU to hold off implementation of the new measure for two weeks, and give her unt il the next EU summit on 28-29 June for talks with other EU count ries to st rike bilateral deals. A compromise solut ion hence seems likely at this stage, but further escalat ion between the polit ical camps could easily result in a confidence vote on the chancellor and a possible break in the governing coalition.

Daily Pivots: (S1) 0.9951; (P) 0.9970; (R1) 0.9995; More...

Intraday bias in USD/CHF remains on the upside for 1.0056. Firm break there will resume the rally from 0.9186 and target 61.8% projection of 0.9186 to 1.0056 from 0.9787 at 1.0325, which is close to 1.0342 key resistance. On the downside, though, below 0.9894 minor support will turn bias neutral and could extend the correction from 1.0056 for a while.

In the bigger picture, medium term decline from 1.0342 has completed with three waves down to 0.9186. Rise from there is currently viewed as a leg inside the long term range pattern. Hence, while further rally would be seen, we'd be cautious on strong resistance from 1.0342 to limit upside. For now, further rise is expected as long as 38.2% retracement of 0.9186 to 1.0056 at 0.9724 holds. However, sustained break of 0.9724 will dampen this bullish view and would at least bring deeper fall to 61.8% retracement at 0.9518.

Daily Pivots: (S1) 110.40; (P) 110.65; (R1) 110.92; More...

USD/JPY continues to lose upside momentum as seen in 4 hour MACD. With 109.91 minor support intact, further rise is mildly in favor for 113.39 resistance. Break there will resume larger rebound from 104.62 and target 114.73 resistance. On the downside, though, break of 109.91 will turn bias to the downside and bring another fall towards 108.10 to extend the corrective pattern from 111.39.

In the bigger picture, at this point, we're slightly favoring the case that corrective decline from 118.65 (2016 high) has completed with three waves down to 104.62. Above 111.39 will affirm this view and target 114.73 for confirmation. However, it should be noted that USD/JPY is bounded in medium term falling channel from 118.65 (2016 high). Sustained break of 61.8% retracement of 104.62 to 111.39 at 107.20 will likely resume the fall from 118.65 through 104.62 low.

Daily Pivots: (S1) 0.7426; (P) 0.7456; (R1) 0.7474; More...

Intraday bias in AUD/USD remains on the downside for 0.7411 support. Break will resume larger fall from 0.8135 for 0.7328 cluster support (61.8% retracement of 0.6826 to 0.8135 at 0.7326). On the upside, break of 0.7528 minor resistance is needed to indicate completion of the fall from 0.7676. Otherwise, outlook will remain cautiously bearish in case of recovery.

In the bigger picture, medium term rebound from 0.6826 is seen as a corrective move. Prior break of 0.7500 key support suggests that such correction is completed at 0.8135. Deeper decline would be seen back to retest 0.6826 low. In case of another rise, we'd expect strong resistance from 38.2% retracement of 1.1079 to 0.6826 at 0.8451 to limit upside to bring long term down trend resumption eventually.

Daily Pivots: (S1) 1.3129; (P) 1.3170; (R1) 1.3245; More...

Intraday bias in USD/CAD remains on the upside Current rally should target 100% projection of 1.2246 to 1.3124 from 1.2526 at 1.3404 next. On the downside, below 1.3120 minor support will turn intraday bias neutral and bring consolidation first, before staying another rally.

In the bigger picture, current development solidify the view of bullish trend reversal. That is fall from 1.4689 (2015 high) has completed at 1.2061, ahead of 50% retracement of 0.9406 (2011 low) to 1.4689 (2015 high) at 1.2048. Further rally should be seen for 61.8% retracement of 1.4689 to 1.2061 at 1.3685 and above. This will now be the preferred case as long as 1.2526 support holds, even in case of deep pull back.

Key Highlights

• The Euro failed to move above the 1.1850 resistance and declined sharply against the US Dollar.
• There was a break below two key bullish trend lines with support near 1.1760 and 1.1700 on the 4-hours chart of EUR/USD.
• The Euro Zone CPI in May 2018 increased 0.5% (MoM), like the forecast.
• Today in the US, the NAHB Housing Market for June 2018 will be released, which is forecasted to remain at 70.

EURUSD Technical Analysis

The Euro was seen struggling to move past the 1.1840 and 1.1850 resistance levels against the US Dollar. The EUR/USD pair declined sharply and broke the 1.1700 support area to move into a bearish zone.

Looking at the chart, there was a failure to break the 1.1850 resistance, resulting in a downside push below 1.1750 and 1.1700 supports. The pair also moved into a bearish zone below 1.1700, 100 simple moving average (red, 4-hour) and 200 simple moving average (green, 4-hour).

The decline was such that the pair even broke the 1.1600 support and traded towards 1.1540. Later, a minor upside correction was initiated, and the pair tested the 23.6% fib retracement level of the last drop from the 1.1851 high to 1.1543 low.

On the upside, resistances are seen near the 1.1650 and 1.1700 resistance levels. On the downside, below the recent low of 1.1540, the next major support is near 1.1510-1.1510. As long as the pair is below the 1.1650 level, there is a risk of a downside break below 1.1540 and 1.1510 in the near term.

Recently in the Euro Zone, the CPI release for May 2018 was released. The market was looking for a rise of 0.5% compared with the previous month.

The actual result was similar, and the yearly change was also in line with the forecast of 1.9%. The market sentiment is currently stable, but there is a risk of more losses as long as the pair is below 1.1650.

Economic Releases to Watch Today

• US NAHB Housing Market for June 2018 – Forecast 70, versus 70 previous.

Daily Pivots: (S1) 1.5496; (P) 1.5551; (R1) 1.5652; More....

Intraday bias in EUR/AUD remains neutral at this point. For now, in case of another rise, we'd expect strong resistance below 1.5773 support turned resistance to bring fall resumption. Below 1.5425 will bring retest of 1.5271 low first. Break will resume the fall from 1.6189 and target 1.5153 key support next.

In the bigger picture, rally from 1.3624 (2017 low) should have completed at 1.6189 already, ahead of 1.6587 key resistance (2015 high). 1.6189 is seen as a medium term top. Deeper fall would be seen to 38.2% retracement of 1.3624 to 1.6189 at 1.5209 first. Decisive break there will pave the way to 61.8% retracement at 1.4604. In that case, we'll look for bottoming again below 1.4604. On the upside, firm break of 1.5773 support turned resistance is needed to indicate completion of the fall from 1.6189. Otherwise, further decline is expected in medium term, even in case of strong rebound.

Daily Pivots: (S1) 0.8718; (P) 0.8738; (R1) 0.8757; More...

Intraday bias in EUR/GBP remains neutral for the moment. With 0.8693 minor support intact, we'd favor another rise. On the upside, break of 0.8844 will resume the rebound from 0.8620 for 0.8967 cluster resistance (50% retracement of 0.9305 to 0.8620 at 0.8963). However, break of 0.8693 will bring deeper fall back to retest 0.8620 low.

In the bigger picture, for now, the decline from 0.9305 is seen as a leg inside the long term consolidation pattern from 0.9304 (2016 high). Such consolidation pattern could extend further. Hence, in case of strong rally, we'd be cautious on strong resistance by 0.9304/5 to limit upside. Meanwhile, in another decline attempt, we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside.