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Daily Pivots: (S1) 131.44; (P) 132.84; (R1) 133.76; More...

EUR/JPY's pull back from 134.39 is still in progress. But still, it's holding above 131.69 resistance turned support and outlook remains bullish. Above 133.02 minor resistance will turn bias back to the upside. Sustained break of 134.20 fibonacci level will extend larger up trend to 141.04 resistance next. However, break of 131.69 will be an early sigh of medium term reversal and will target 127.55 key support level instead.

In the bigger picture, current rise from 109.03 is seen as at the same degree as the down trend from 149.76 (2014 high) to 109.03 (2016 low). 61.8% retracement of 149.76 to 109.03 at 134.20 is already met. Sustained break there will pave the way to key long term resistance zone at 141.04/149.76. On the downside, break of 127.55 support is needed to be the first signal of medium term reversal. Otherwise, outlook will remain bullish.

The pair is standing at the back foot in early Tuesday's trading and holding just above fresh one-week lows at 109.47/49 (Mon/Tue lows), as strong rhetoric between the US and North Korea increased geopolitical tensions again.

The greenback holds in red for the third straight day against yen and probed again below strong support at 111.54 (top of thick daily cloud) as war of words between two countries escalated on Monday, triggering fresh safe-haven buying.

The risk of deeper pullback is building, with firm break below key support zone between 111.54/44 (daily cloud top/rising 10SMA) is needed to generate stronger bearish signal.

Plethora of supports that lay below (111.13/07, daily Tenkan-sen/100SMA and thick 4-hr cloud, spanned between 111.12/109.59), may limit yen's risk-off rally, as strong bullish setup of daily studies favors limited correction off 112.71 high before bulls resume.

Today's focus is on the speech of Fed Chair Janet Yellen (due at 16:45 GMT), as market participants are awaiting more clues on whether the Fed remains on track to raise interest rates in December, as signaled on last week's policy meeting.

Hawkish stance from Yellen would offer fresh support to the greenback and offset negative impact from the situation over North Korea. Bullish scenario requires sustained break above 200SMA (112.09) to generate fresh bullish signal and turn near-term bias higher.

Res: 111.80, 112.09, 112.52, 112.80
Sup: 111.54, 111.11, 110.65, 110.43

GBPUSD holds a neutral bias near the highest level since June 2016. The market became overbought after the recent rally from 1.2773 stalled at a high of 1.3656 on September 20. This was indicated by the daily RSI rising above 70. RSI has since eased back below this level and is flat, suggesting that upside momentum has faded.

GBPUSD has been trading sideways between 1.3430 and 1.3656 since mid-September following rapid gains from the end of August. A break below the range-low of 1.3430 would target the key 1.3400 level. Below this, the 1.3200 handle comes into view, with support expected at the September 14 low of 1.3148. Another extension lower would indicate that the recent bullish phase has ended.

The broader trend higher in the GBPUSD remains intact and is supported by the bullish alignment of the 50-day and 200-day moving averages. However, the 1.3656 peak seen earlier this month is acting as a solid resistance and it would be quite a challenge to break above it. The odds of a move above this peak in the near-term are low and GBPUSD is expected to remain neutral.

Key Highlights

• The British Pound remains well supported for more gains above 1.3500 against the US Dollar.
• There are two bullish trend lines forming with support at 1.3460 and 1.3240 on the 4-hours chart of GBP/USD.
• The Dallas Fed manufacturing Index in Sep 2017 rose from 17.8 to 21.3.
• The US New Home Sales figure will be released for August 2017, which is forecasted to increase 3.3% (MoM).

GBPUSD Technical Analysis

The British Pound started a nasty uptrend from the 1.3000 swing low against the US Dollar. The GBP/USD pair is now well above 1.3400 and eyeing further gains.

The pair moved above the 1.3500 level recently and traded as high as 1.3657 before starting a correction. It corrected towards 1.3440 where buyers emerged. On the downside, there are two bullish trend lines forming with support at 1.3460 and 1.3240 on the 4-hours chart.

Moreover, the pair is well above the 100 simple moving average (H4) and 1.3400. On the upside, there is a connecting bearish trend line with resistance at 1.3520.

Should there be a break of 1.3520, GBP/USD could retest the 1.3600 handle in the near term. An intermediate resistance is the 50% Fib retracement level of the last decline from the 1.3657 high to 1.3431 low at 1.3544.

Dallas Fed Manufacturing Index

Recently in the US, the Dallas Fed manufacturing for Sep 2017 (Prelim) was released by the Federal Reserve Bank of Dallas. The forecast was slated for a decline from the last reading of 17.0 to 11.5.

The actual result was better, as there was a rise in the business index from 17.0 to 21.3. On the other hand, the production index, measuring state manufacturing conditions decreased from 20.3 to 19.5.

The report added that:

Labor market measures suggested faster employment growth and longer workweeks this month. The employment index came in at 16.3, its highest level since April 2014. Twenty-eight percent of firms noted net hiring, compared with 11 percent noting net layoffs. The hours worked index rose four points to 18.4.

The overall result was positive, which caused minor downsides in GBP/USD. However, the pair is still above its uptrend support and eying gains above 1.3500.

Other Economic Releases to Watch Today

US New Home Sales for August 2017 – Forecast +3.3% (MoM) versus -9.4% previous.

S&P/Case-Shiller Home Price Indices for July 2017 (YoY) – Forecast +5.8%, versus +5.7% previous.

Fed’s Yellen’s Speech.

The rhetoric continues between North Korea and the United States with North Korea's Foreign Minister, Ri Yong Ho, describing President Trump's recent comments as 'tantamount to a declaration of war' and even stating that Pyongyang reserved the right to take countermeasures that could include shooting down US bombers that are not inside Korea's air space. The White House was quick to deny such claims and Trump's Security Advisor has commented that the US has 4 or 5 different scenarios as to a resolution, stating that 'some are uglier than others'. Meanwhile, China's Ambassador to the United Nations has stated that the situation is 'getting too dangerous'. As the 'war of words' continues the markets will be evaluating risk and will act accordingly.

ECB President Mario Draghi addressed the European Parliament's committee on economic affairs on Monday and commented that 'Overall, we are becoming more confident that inflation will eventually head to levels in line with our inflation aim, but we also know that a very substantial degree of monetary accommodation is still needed for the upward inflation path to materialize'. The speech held no surprises as it remained consistent with the ECB's Policy Statement it made in September. EUR did suffer, falling 1% on Monday over fears of the German right wing political party's recent impressive showing in the German elections and the fact that Chancellor Merkel will need time to form a new coalition government.

In the United States, New York Fed President William Dudley commented to students and professors at a Community College in NY State that 'With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the (Fed‘s) 2% objective over the medium term'. He also added 'In response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually'. Dudley's comment mirrored the comments he made earlier in September and reinforced the expectation of a rate hike in December.

EURUSD, after dropping 1% on Monday to a 4-week low of 1.1831, recovered slightly in early trading to currently trade around 1.1860.

USDJPY dropped over 0.3% on Monday and appears to remain under pressure in early Tuesday trading. Currently, USDJPY is trading around 111.60.

GBPUSD has improved 0.2% overnight to currently trade around 1.3490.

Gold gained over 1% on Monday, as risk-off sentiment gathered pace with the latest 'exchange' of words between the US and North Korea. Currently, Gold is trading around $1,310.

WTI saw its most dramatic one-day gain for several months, as it improved by over 3% on Tuesday. With Turkey threatening to cut crude oil flows from Iraq's Kurdistan region to the outside world, London Brent hit a 26-month high of $58.40 overnight. Currently, Brent is trading around $58.40 with WTI trading around $59.20 in early Tuesday trading.

Major economic data releases for today:

At 13:00 BST, Chairing of Jean Monnet Lecture 'Good Pension Design' by ECB Praet at the Second ECB Annual Research Conference organized by the ECB in Frankfurt, Germany.

At 14:30 BST, FOMC Member, and President and CEO of the Federal Reserve Bank of Cleveland, Loretta Mester is scheduled to speak in Ohio, USA.

At 15:00 BST, the US Census Bureau will release New Home Sales and New Home Sales Change (MoM) for August. The forecast is for a slight increase in New Home Sales to 0.585M (prev. 0.571M) and New Home Sales Change to come in at 3.3% (prev. -9.4%)

At 15:30 BST, FOMC Member Lael Brainard is speaking in Washington D.C. at the Federal Reserve Board Conference: Disparities in the Labor Market: What are we missing?

At 17:45 BST, Fed Chair Janet Yellen is scheduled to speak at the 59th NABE Annual Meeting in Cleveland, Ohio on: Inflation, Uncertainty, and Monetary Policy.

Sunrise Market Commentary

• Rates: Will risk sentiment continue to support core bonds?
  Core bonds profited yesterday of renewed sabre rattling between North Korea and the US, giving the profit taking on shorts more impetus. Today's data will be largely ignored at the expense of the risk sentiment. There might be some more correction, but we still are in a sell-on-uptick modus, also as oil prices are moving higher.
• Currencies: EUR/USD and EUR/GBP are nearing significant support levels
  Yesterday, sentiment on the euro obviously turned less positive after the German election even as the impact on other markets was modest. A risk-off correction also weighed more on the euro than on the dollar. Eco data probably won't be decisive for FX trading today. If EUR/USD drops below 1.1823, the recent correction might have further to go.

The Sunrise Headlines

• US equities were hard hit by North Korean threats, but recovered quite well limiting daily losses. NASDAQ lost more ground. Asian equities trade marginally lower.
• Brent crude oil has risen above $59 a barrel to its highest in more than two years, lifted by fast-growing demand and a threat to Iraqi Kurdistan's crude exports as the autonomous region holds a referendum on independence
• The U.S. has gamed out four or five scenarios on how the crisis with North Korea will be resolved, and "some are uglier than others," McMaster said. U.S. officials dismissed as "absurd" N-K Ri Yong Ho's comment that Trump's UN speech amounted to a declaration of war.
• NY Fed Dudley signalled one more hike this year, calling factors holding down prices temporary, while Chicago's Fed Evans and Minneapolis Fed Kashkari said tightening before seeing signs of wage and price pressure would be a mistake.
• The ECB is not scared of tapering QE, ECB Coeure said. The board member said any exit will be careful and "in light of the price stability mandate.”
• Iraq's parliament voted to ban Kurdish crude exports, take back control of disputed oil fields and demanded troops be sent to Kurdistan-controlled territory after Monday's non-binding independence referendum. Turkish President Erdogan hinted at shutting off oil exports and at a military response.
• Today's calendar contains US New Home sales, consumer confidence and the Richmond Fed survey. Focus will though be on geopolitical issues, and on the manifold Fed and ECB speakers.

Currencies: EUR/USD And EUR/GBP Are Nearing Significant Support Levels

Will EUR/USD drop below 1.1823 support?

Yesterday, the focus for FX trading turned from the dollar to the euro. The German election outcome might complicate intra-EMU cooperation. EUR/USD settled in a gradual intraday downtrend. The pair dropped below 1.19. ECB Draghi mentioned the recent rise of the euro as a source of volatility/uncertainty. Later on a new exchange of hostile comments between North Korea and the US made investors look for safe havens. The risk-off triggered a simultaneous decline of USD/JPY, EUR/USD and EUR/JPY. USD/JPY finished the session at 111.73. EUR/USD close the day at 1.1848. A real test of the 1.1823 support didn't occur.

Yesterday's risk-off trade in the US also leaves its traces in Asian overnight. Major Asian equity indices show minor losses. USD/JPY hovers in the mid 111 area, near yesterday's low. However, yesterday's motive, additional fiscal spending ahead of the snap elections, doesn't support the yen anymore. EUR/USD stabilizes in the mid 1.18 area. Oil jumped sharply higher yesterday and maintains its gains this morning (Brent 59.40 $/p), but there is no obvious (invers) link with the dollar.

Today, the eco calendar is well filled with US economic data, Fed speakers including Yellen and ECB speakers Praet and Liikanen. US New Home sales declined sharply in July (-9,4% M/M). They are notoriously volatile and we expect a significant rebound in August. Consumer confidence (Conference board) was near a cyclical high in August (122.9). However, the hurricanes and higher gasoline prices suggest a decline in September. The market reaction on a weaker figure (consensus 119.5) should be modest. CB speakers are a wildcard. However, Yellen probably will hold the line of last week's press conference. We don't expected ECB's Praet to bring key new elements on the ECB policy debate at this stage.

Yesterday, the uncertain political consequences of the German election outcome for Germany and for Europe weighed slightly on the euro. Contrary to what was the case of late, a flaring up of risk-off sentiment this time weighed more on the euro than on the dollar. So, there are tentative signs that market sentiment turned less euro friendly. Today's eco data probably won't be a big help for the dollar. However, question remains whether global sentiment (cautious risk-off) and/or CB talk will sustain a further euro correction. We have the impression that yesterday's trends (simultaneous decline of USD/JPY, EUR/USD and EUR/JPY) might go somewhat further. A break of EUR/USD below 1.1823 could inspire a further technical repositioning.

From a technical point of view EUR/USD hovers in a consolidation pattern between 1.1823 and 1.2070. It was disappointing for EUR/USD bears that the recent correction didn't reach the range bottom. More confirmation is needed that the bottoming out process in US yields and in the dollar might be the start of more sustained USD gains (against the euro). In case of a break, next support in EUR/USD comes in at 1.1774 and 1.1662 The day-to-day momentum in USD/JPY was constructive recently, but it was in the first place due to yen weakness. USD/JPY regained the 110.67/95 previous resistance, a short-term positive. The 114. 49 correction top is the next important reference. However, yesterday's price action suggests that this cross rate remains sensitive to changes in overall risk sentiment.

German election and global risk-off push EUR/USD close to 1.1823 support

EUR/GBP

EUR/GBP: euro softness to inspire further losses?

Sterling trading was driven by global markets reaction to the German election results. The euro remained under pressure in early European dealings. EUR/GBP declined to the 0.8785 area. The rise of sterling temporary propelled cable, but finally the dollar outperformed the euro and sterling. The German election outcome might complicate the Brexit negotiations. It hasn't become easier for Merkel to make concessions. The risk-off correction (North-Korea) later in the session affected EUR/USD and cable in a similar way. Cable closed at 1.3466. EUR/GBP hovered with reach of the recent lows and close the session at 0.8798

Today, UK loans for housing are only of intraday significance. The formal Brexit negotiations restarted yesterday evening. There is no indication that a break-through on the stalemate is imminent. The EU wants progress on the conditions of the divorce, before considering talking on a new trade relationship. In theory this is negative for sterling, but the market focus isn't on the Brexit negotiations. In line with the assessment on EUR/USD, we think that the euro sentiment has worsened after the German election. If so, the EUR/GBP correction might have some further to go.

EUR/GBP made an impressive uptrend since April and set a MT top at 0.9307 late August. Recent UK price data amended the dynamics and the reversal of sterling was reinforced by hawkish BoE comments. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of relative euro strength and sterling softness to persist. However, the prospect of (limited) withdrawal of BOE stimulus put a solid floor for sterling ST term. We look how far the current correction has to go. EUR/GBP is nearing support at 0.8743 and 0.8652, which we consider difficult to break

EUR/GBP: near recent lows

Download entire Sunrise Market Commentary

Daily Pivots: (S1) 0.8767; (P) 0.8803; (R1) 0.8830; More

EUR/GBP's break of 0.8773 suggests resumption of fall from 0.9305. Intraday bias is back on the downside for 61.8% retracement of 0.8312 to 0.9305 at 0.8691 and below. Such decline is seen as the third leg of consolidation pattern from 0.9304. We'll look for bottoming signal again at it approaches 0.8303 support. However, break of 0.8884 minor resistance is needed to indicate short term bottoming. Otherwise, outlook will stay bearish in case of recovery.

In the bigger picture, price actions from 0.9304 are viewed as a medium term corrective pattern. It's still in progress with fall from 0.9305 as the third leg. Break of 0.8303 could be seen. 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. Whole up trend from 0.6935 is expected to resume after consolidation from 0.9304 completes.

While Euro is staying soft, after post German election selloff, it's still holding above near term support against Dollar and Yen. Weakness is mainly seen against Sterling as 0.8773 support is taken out. Also, the common currency has not yet shown any sign of a rebound. Meanwhile, Dollar is turning slightly softer against others while Yen is picking up some strength. Mixed comments from Fed officials provided little support the the greenback. While are still pricing in more than 70% chance of a December Fed hike, the decision will remain very much data dependent. Tensions between US and North Korea remain tight as verbal exchanges between leaders continued to escalate.

North Korea boosting defense in its east coast

South Korea news agency Yonhap reported that North Korean has been boosting defense in its east coast as tensions between US and the North escalated. North Korea Foreign Minister Ri Yong Ho complained yesterday that US President Donald Trump's tweet that Ri and leader Kim Jong Un "won't be around much longer" was a declaration of war. And, North Korea has every right on counter measures including shooting down US bombers "even when they are not inside the airspace border of our country". And Ri warned that "the whole world should clearly remember it was the U.S. who first declared war on our country." White House Press Secretary denied that and said "we've not declared war on North Korea. And frankly, the suggestion of that is absurd."

Chicago Fed Evans a little nervous that inflation weakness is structural

Chicago Fed President Charles Evans, a dove, repeated his call for cautious and gradual approach to rate hike. Even though he is "broadly comfortable" with Fed's projections, his emphasized that "this path are not set in stone". And, "as the FOMC comes to decision points over the coming months, I think we need to see clear signs of building wage and price pressures before taking the next step in removing accommodation." Also, it would take "a couple more months of data" before confirming that the slow down in inflation was temporary. And he is " a little nervous that some of the recent weakness might be a little more structural."

On the other hand, New York Fed President William Dudley said that "With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the 2 percent objective over the medium term". And, "in response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually."

ECB Draghi: We can't afford hasty moves

ECB President Mario Draghi spoke to the European Parliament's comment on economic affairs in Brussels yesterday. Draghi emphasized the need to be "sensitive to the danger of not halting a recovery through hasty monetary-policy decision making." And he warned that "we can't afford hasty moves." And any change, or so called re-calibration of monetary policies will maintain  "the degree of monetary support that the euro-area economy still needs to complete its transition to a new balanced growth trajectory characterized by sustained conditions of price stability." Nonetheless, Draghi still sounded upbeat and noted that "economic expansion is now firm and broad-based across euro area countries and sectors." And, policymakers "are becoming more confident that inflation will eventually head to levels in line with our inflation aim".

Separately, ECB Executive Board member Yves Mersch said that the central bank will continue to "prudently adjust our toolbox of monetary policy instruments" once there is "a sufficiently sustained adjustment in the path of inflation." Regarding the stimulus program, Mersch noted that "while the temporary collateral framework has successfully eased potential collateral shortages, it could be argued that it should not become part of the regular framework". That is, collateral rules could now be tightened up as ECB can also start shifting back to "a more conventional environment for the conduct of monetary policy.

French Macron to deliver Euro reform speech

French President Emmanuel Macron will deliver a speech in Paris today, outlining his proposals on reforms in Europe. And it's seen as an appropriate step to voice our his ideas before German Chancellor Angela Merkel has formed the coalition after Sunday's election. The key elements of Macron's reform include reinforcing the Euro against future shocks, a European agency for innovation and a system on start-up funding. However, the untested coalition of CDU, FDP and Greens in Germany could prove to be intrinsically unstable. And negations could take months that might delay Macron's plan.

EU and UK still at odds over key Brexit issues

As the fourth round of Brexit negotiations started, the EU and UK are clearly staying at odds over the key issues. EU's chief negotiator Michel Barnier emphasized that "we cannot discuss a transition period without reaching a preliminary agreement on an orderly withdrawal." And he reiterated that "real progress on the three main issues is essential to move to a discussion on the transition as well as the future, these are separate issues." Also, Barnier pointed out that a future trade agreement and so called transition or implementation period are not foregone conclusions. And "without exception", UK will remain subject to EU budge, jurisdiction if it choose to stay in the single market after Brexit.

UK's Brexit Secretary David Davis, on the other hand, emphasized that "we do not want our EU partners to worry they will pay more or receive less over the remainder of the current budget plan as a result of our decision to leave." And, "the UK will honour commitments we've made during the period of our membership." However, Davis also emphasized that "it's obvious that reaching a conclusion on this issue can only be done in the context of, and in accordance with, our new deep and special partnership with the EU."

While the talks of the Brexit teams carry on in Brussels, UK Prime Minister Theresa May will meet with European Council President Donald Tusk in London today.

New Zealand business confidence tumbled

New Zealand NBNZ business confidence sank to 0 in September, down sharply from 18.3. That's the third straight month of decline and the lowest reading since September 2015. Nonetheless, ANZ chief economist Cameron Bagrie noted today that news economic drivers are emerging and growth would remain "respectable". The drivers are appearing in form of "higher commodity prices, rising household incomes and expansionary fiscal policy". Nonetheless, Bagrie also pointed out, after the election over the weekend, "policy uncertainty will rise over the coming months as political horse trading takes place" and that can be "unsettling". Also from New Zealand, trade deficit came in much higher than expected at NZD -1235m in August.

Oil prices surged on supply disruption concern

Oil prices jumped on concerns over potential supply disruption after Turkey threatened to "close the valves" on Kurdistan's oil exports. This was due to Turkey's objections over an independence referendum held in the Kurdistan region of Iraq. While the Iraqi government has condemned the act, Turkish and Iranian worried that the controversial referendum would be contagious, causing the huge Kurdish population in their countries to do the same. Western powers, including US and UK have also warned that the referendum would exacerbate the instability in the MENA region. However, these powers have not considered their indifference towards the suppression on the people in Kurdish region. Indeed, their concerns probably only lie on the oil. Kurdistan is home to 40% of Iraq's oil reserves. It is estimated that Kurdistan has oil reserve of at least 45B barrel with exports of around 600K bpd. Most of the oil leaves the region via a pipeline from Kirkuk to the Turkish city of Ceyhan, to export markets in Russia and Europe. Oil facilities in the regions were relatively undamaged despite US' invasion in Iraq in 2003. It would create another conflict, in case of a Kurdistan independence, on the ownership of the region's oil revenue and the lucrative oil reserve.

EUR/GBP Daily Outlook

Daily Pivots: (S1) 0.8767; (P) 0.8803; (R1) 0.8830; More

EUR/GBP's break of 0.8773 suggests resumption of fall from 0.9305. Intraday bias is back on the downside for 61.8% retracement of 0.8312 to 0.9305 at 0.8691 and below. Such decline is seen as the third leg of consolidation pattern from 0.9304. We'll look for bottoming signal again at it approaches 0.8303 support. However, break of 0.8884 minor resistance is needed to indicate short term bottoming. Otherwise, outlook will stay bearish in case of recovery.

In the bigger picture, price actions from 0.9304 are viewed as a medium term corrective pattern. It's still in progress with fall from 0.9305 as the third leg. Break of 0.8303 could be seen. 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. Whole up trend from 0.6935 is expected to resume after consolidation from 0.9304 completes.

Economic Indicators Update

XAUUSD (1310.74): Gold prices rebounded strongly in the day yesterday as price action closed above the support zone of 1300.86 yesterday. We expect this continuation to push prices higher in the near term. Gold prices will need to test the resistance level at 1324.72 - 1320.39 region. A reversal here could push gold prices back lower to the support level. A rebound off this level could keep the bullish bias intact as gold prices could eventually break past 1324.72 and target the next main level at 1345.87.

GBPUSD (1.3483): The British pound also continues with its consolidation with price action briefly slipping below 1.3488 support. Th re-adjusted bullish flag pattern remains in play although price will need to breakout from this bullish pattern to signal continuation. Continued consolidation within 1.3558 - 1.3488 could potentially weaken the bullish chart pattern and increase the risk of a downside breakout. A daily close below 1.3441 could validate this bearish bias as GBPUSD could be seen pushing lower towards 1.3236.