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USD/CHF - 0.9723

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 0.9719

Kijun-Sen level                    : 0.9689

Ichimoku cloud top                 : 0.9683

Ichimoku cloud bottom              : 0.9682

Original strategy :

Sold at 0.9720, stopped profit at 0.9715

Position : - Short at 0.9720

Target :  -

Stop : - 0.9715

New strategy  :

Buy at 0.9685, Target: 0.9785, Stop: 0.9650

Position : -

Target :  -

Stop : -

Although the greenback slipped to 0.9641, lack of follow through selling and the subsequent rally on dollar’s broad-based strength suggest low has been formed at 0.9613 last week and mild upside bias is seen for the erratic rise from there to extend gain to 0.9760-65, however, reckon resistance at 0.9808 would hold from here, bring retreat later.

In view of this, we re looking to buy dollar on pullback as 0.9680-85 should limit downside. Only break of said support at 0.9641 would abort and revive bearishness and suggest the rebound from 0.9613 has ended instead, bring retest of this level later.

Daily Pivots: (S1) 108.79; (P) 109.56; (R1) 110.34; More...

USD/JPY's fall from 114.36 resumed by taking out 109.11. Despite subsequent recovery, 4 hour MACD stays below signal line. Intraday bias remains on the downside for 108.12 low first. Break will extend the whole corrective fall from 118.65 to 61.8% retracement of 98.97 to 118.65 at 106.48. We will look for bottoming sign there. On the upside, break of 110.80 resistance is needed to indicate completion of fall from 114.36. Otherwise, outlook will stay bearish in case of recovery.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. It's uncertain whether it's completed yet. But in case of another fall, downside should be contained by 61.8% retracement of 75.56 to 125.85 at 94.77 to bring rebound. Overall, rise from 75.56 is still expected to resume later after the correction from 125.85 completes.

Market movers today

Please note that today at 09:00 CET we publish the Nordic Outlook, which is our quarterly publication that presents our view on the economic out look for the Nordic countries. The publication does not contain new financial forecasts.

In the UK, focus is on Bank of England meeting at 13:00 CET. It is one of the small meetings with an Inflation Report and a press conference, so focus will be solely on the tone in the summary and minutes, as no one expects any policy changes. Our base case is that BoE maintains the hawkish twist to its neutral stance but given Q1 GDP growth was revised down (and not up as BoE expected) and nominal wage growth has declined, risk is tilted towards a more dovish tone. Market pricing seems fair at the moment as the first full hike is not priced in before late 2019.

Also in the UK, we getretail sales for May at 10.30 CET.

In the US, focus is on the Empire and Philly Fed manufacturing indices (both due at 14:30 CET), which may give us some indication about what to expect of ISM manufacturing in May. We also get actual industrial production data for May at 15:15 CET.

Selected market news

Fed hikes despite weaker data, provides details on quantitative tightening. As was generally expected, the Fed delivered its second 25bp rate hike so far this year (only Kashkari dissented). Thereby, the Fed defied the recent trend lower in inflation, as both CPI and PCE are below 2%, and the general softening in US economic data witnessed as of late. At the press conference, Fed Chair Yellen was relatively hawkish, referring to the decline in inflation as 'noise', while repeatedly referring to the low unemploymentrate. The 'dots' were unchanged in projecting one more hike this year, three hikes next year and a neutral Fed funds rate at 3%. Interestingly, however, the Fed issued an addendum to it s 'Policy Normalization Principles and Plans', providing details on how it expects to shrink its balance sheet in a process that should start later this year. For more information, 15 June 2017.

Market sends USD stronger, US fixed income holds on to gains. EUR/USD dipped back towards the 1.12 level, after rising earlier in the day on the weak US May inflation print (core CPI lower to 1.7% y/y vs. expectations of 1.9 % and 1.9% in April). US Treasuries sold off slight ly on Fed, but still trade richer over the day. The S&P500 index closed the day 0.1% lower, with losses driven by the energy sector.

Daily Pivots: (S1) 0.9654; (P) 0.9694; (R1) 0.9749; More.....

USD/CHF's recovery from 0.9613 is still in progress. But upside is limited well below 0.9807 resistance so far. Intraday bias stays neutral at this point. As long as 0.9807 resistance holds, outlook remains cautiously bearish and deeper fall is expected. Break of 0.9613 will extend the whole decline from 1.0342 to 0.9548 support and below. We'd start to look for bottoming signal again as it approaches 0.9443 key support level. However, considering bullish convergence condition in 4 hour MACD, break of 0.9807 will indicate near term reversal and turn outlook bullish for 1.0099 resistance next.

In the bigger picture, USD/CHF is still bounded in medium term range of 0.9443/1.0342 for the moment. Consolidative trading would likely continue and medium term outlook remains neutral. Break of 1.0342 key resistance is needed to confirm underlying bullish momentum in the pair. Meanwhile, downside attempts should be contained by 0.9443 key support level. However, sustained break of 0.9443 will carry larger bearish implication and target 0.9 handle.

GBP/USD - 1.2729

Most recent candlesticks pattern   : N/A

Trend                                 : Near term down

Tenkan-Sen level                 : 1.2742

Kijun-Sen level                    : 1.2771

Ichimoku cloud top              : 1.2724

Ichimoku cloud bottom        : 1.2704

Original strategy :

Sell at 1.2850, Target: 1.2750, Stop: 1.2885

Position : - 

Target :  -

Stop : -

New strategy  :

Sell at 1.2790, Target: 1.2690, Stop: 1.2825

Position : -

Target :  -

Stop : -

As the British pound ran into resistance at 1.2818 yesterday and has retreated on dollar’s broad-based strength after Fed rate hike, suggesting the rebound d from 1.2635 has ended there and consolidation with mild downside bias remains for weakness to 1.2700, however, break of 1.2680 is needed to retain bearishness and bring further fall to 1.2650, then towards said support at 1.2635.

In view of this, we are looking to sell cable on recovery as 1.2790-00 should limit upside. Above said resistance at 1.2818 would defer and risk a strong rebound to 1.2845-50 (61.8% Fibonacci retracement of 1.2978-1.2635) but upside should be limited to 1.2870-80. 

Daily Pivots: (S1) 1.2710; (P) 1.2764; (R1) 1.2804; More...

GBP/USD failed to sustain above 4 hour 55 EMA and retreats. At this point, intraday bias remains neutral and the consolidation from 1.2633 temporary low might extend. Near term outlook remains bearish with 1.2977 resistance intact. We continue to favor the case that consolidation pattern from 1.1946 has completed at 1.3047 already. Decisive break of 1.2614 resistance turned support would confirm our bearish view and target a test on 1.1946 low next. However, break of 1.2977 will dampen our view and turn bias back to the upside for 1.3047 and above.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. Price actions from 1.1946 medium term low are seen as a consolidation pattern, which could have completed after hitting 55 week EMA. Break of 1.1946 low will target 61.8% projection of 1.5016 to 1.1946 from 1.3047 at 1.1150 next. In case the consolidation from 1.1946 extends, outlook will stay remain bearish as long as 1.3444 resistance holds.

EUR/USD - 1.1192

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 1.1207

Kijun-Sen level                  : 1.1241

Ichimoku cloud top             : 1.1209

Ichimoku cloud bottom      : 1.1209

Original strategy  :

Bought at 1.1235, stopped at 1.1200

Position : - Long at 1.1235

Target :  -

Stop : - 1.1200

New strategy  :

Sell at 1.1240, Target: 1.1140, Stop: 1.1275

Position : -

Target :  -

Stop : -

Although the single currency surged to as high as 1.1296, lack of follow through buying on break of previous resistance at 1.1285 and the subsequent reversal signal top has been formed there and consolidation with downside bias is seen for weakness to previous support at 1.1166 but break there is needed to add credence to this view, bring further fall to 1.1135-40, then towards another previous support at 1.1109.

In view of this, we are looking to sell euro on recovery as 1.1235-40 should limit upside. Above 1.1260-65 would defer and risk rebound to 1.1280 but price should falter below said resistance at 1.1296 and bring another decline later.

• We were obviously wrong about our non-consensus call that the Fed would skip hiking at this meeting. However, we are surprised that the Fed is not more worried about low inflation. We still fear the Fed is making a policy mistake, as economic data do not justify a hike, in our view.
• Unchanged dots but four FOMC members expect no further hikes this year – and we guess three of them are voting members. This puts a third hike this year into question.
• Fed may hike again in December, as it targets unemployment but risks are skewed toward a pause in the hiking cycle, so we expect a maximum of 1-2 hikes next year if anything. More details on quantitative tightening (QT) may come already in September so actual QT can start in Q4.
• Fed plans to shrink the balance sheet by USD300bn the first year and USD600bn per year afterwards, which may be too optimistic in our view. There is a risk that a perfect storm will hit USD liquidity in H2 17.
• A combination of a more dovish Fed and a more hawkish ECB towards year-end may be the catalyst for unlocking the EUR/USD upside potential

As very much expected by everyone else than us, the Federal Reserve hiked its target range by 25bp to 1.00%-1.25%. As we wrote in our preview, we are not surprised that the Fed hiked given the very high expectations but we are surprised that the Fed is not more worried about recent inflation prints, as both CPI and PCE inflation are now below 2%. While the Fed still says it monitors inflation 'closely', Yellen was more hawkish during the press conference, as she said one should not over-interpret the recent fall in inflation rates, which she referred to as 'noise' - this despite the fact that the Fed has failed to achieve its 2% inflation target the past eight years when looking at PCE core inflation.

Yellen repeatedly referred to the low unemployment rate and strong labour market data in general, which should be sufficient to push wage growth and inflation higher eventually, in her view. At least the Fed's inflation target seems more like a ceiling than a symmetric target. Also note that Fed removed that it closely monitors 'global economic and financial developments'. Overall, markets interpreted Yellen's comments at the press conference quite hawkishly, as the USD strengthened and US yields moved higher.

We think we learned two very important things. Firstly, the Fed is not as data dependent as it claims to be. Secondly, the Fed more or less only targets the labour market. As we wrote in FOMC Preview: Expectations are high but economic data do not justify a hike, we fear the Fed is making a policy mistake here, as economic data do not justify a rate hike, in our view. Our base case was that a data-dependent Fed would wait at least one meeting to get more data points to support that the weakness in economic data is temporary, especially as it could afford to stay patient, as underlying inflation pressure is not high. This is also what the market tells us since market-based inflation expectations have dropped since the surprising hike in March and the market thinks it is less than 50/50 whether the Fed hikes again this year. However, we stick to our view that the Fed would at some point be forced to do the right thing.

Turning to the updated projections, the 'dots' signal was unchanged at one more hike this year, three hikes next year and a neutral Fed funds rate at 3%. However, it is quite interesting to look at the individual dots, as four FOMC members expect no further hikes this year. One is obviously Bullard (non-voter), who has been an outlier for a long time. The other is Kashkari who dissented yesterday. The question is whether the last two are voting FOMC members or not. We guess it is Evans and Brainard (both voting FOMC members), who have expressed concerns about the recent weakness in inflation rates. If we are right, three of the nine voting FOMC members are quite dovish, which also puts a third Fed hike this year into question.

Based on yesterday's meeting we agree with markets that it is not a given that the Fed hikes again this year but given the Fed's desire to start quantitative tightening we will likely get more details in September so it can start actual QT in Q4 this year (see more below). Right now we are tilted towards a third hike this year in December, as Yellen targets the unemployment rate, but since monetary policy works with a lag and real rates have risen close to neutral (approximately 0% according to the Laubach-Williams estimate) due to lower inflation expectations, the Fed may not hike again this year. At least we think risks are skewed towards the Fed pausing its hiking cycle next year, so we expect a maximum of 1-2 hikes next year if anything.

Fed may be too hawkish on quantitative tightening

We are also surprised that we got a combination of a rate hike and a lot more details on the Fed's plan to shrink its balance sheet ('quantitative tightening', QT), see also FOMC issues addendum to Policy Normalisation Principles and Plans. That said, we are still missing the two most important details: the actual triggers (which most FOMC members want to attach to a quantitative threshold based on the FOMC minutes from the March meeting, see FOMC minutes: Quantitative tightening moving closer, 5 April) and the target for the future appropriate size of the balance sheet. However, the Fed seems very committed to start QT this year and Yellen said at the press conference that it could begin 'relatively soon', i.e. already in September, so it is not unlikely the Fed has skipped the idea of announcing a quantitative threshold for starting QT.

The Fed plans to:

• Initially cease reinvesting for USD6bn in Treasuries, which will increase in steps of USD6bn every quarter over a year until it reaches USD30bn per month.
• Initially cease reinvesting for USD4bn in mortgage-backed securities, which will increase in steps of USD4bn every quarter over a year until it reaches USD20bn.

In total, the Fed will cease reinvesting in bonds for an amount of USD300bn the first year (60% Treasuries and 40% mortgage-backed securities) and USD600bn per year the following years until the target is reached.

In Research US - Fed's regulatory hurdle for starting quantitative tightening we highlighted an optimistic scenario for reducing the balance sheet to be one that targets a total reduction of around USD1,700bn over five years that would amount to an average monthly reduction of USD30bn. With the details provided, the Fed may be too optimistic about QT, as it will amount to USD50bn per month after the first year. However, we still do not know what target for the level of the balance sheet it aims at.

However, in our view, a good thing is that the Fed recognises that the size of the balance sheet must be higher now than pre-crisis since demand for central bank reserves has increased due to increasing financial regulation. In 2015, most of the largest US banks held 20-50% of their HQLA in cash and central bank reserves. Furthermore, European and Asian banks are also required to monitor their liquidity reserve in USD. Large Nordic banks are required to hold HQLA in USD. That said, it remains a question whether the Fed is still too optimistic about how much it can reduce the balance sheet

EUR/USD still set to move higher in 12M

Following the FOMC announcement EUR/USD essentially saw the gains towards 1.13 caused by the weak US CPI figures in the afternoon being wiped and the cross is now back to slightly above the 1.1210 level. Markets clearly interpreted Fed chair Yellen hawkishly during the press conference since she emphasised the strength of the labour market and downplayed lower actual inflation and inflation expectations. However, the drop in actual core inflation in May combined with lower inflation expectations make the FX market – rightly in our view - doubt that the Fed will in the end be able to move on with the somewhat aggressive tightening scheme that yesterday's message otherwise hints at. In that sense, yesterday's move from the Fed is not too different from that of the ECB last week in illustrating the eagerness of central banks to move away from very accommodative and non-conventional measures, but the inflation outlook does not yet justify them taking such moves much further any time soon. Thus, USD strength driven by Fed should prove temporary in our view.

We are tactically short EUR/USD in the Danske FX Trading Portfolio for a dip below 1.10 in the cross over the summer driven by a Fed determined to move on with policy normalisation and an ECB that could be side-lined for a while as inflation and eurozone growth lose momentum. That said, we see a clear risk of the Fed moving too much, too fast on hikes and/or QT near term and thus will be forced to pause later on - and possibly at a time when the ECB is ready to take the next step away from further easing towards yearend. Crucially, this could in our view be the catalyst for unlocking the EUR/USD upside potential (our models point to the mid 1.20s as 'fair' longer term) that fundamentals have been pointing to for an extended period of time

Perfect storm may hit USD liquidity in H2 17

We see a risk that a perfect storm may hit USD liquidity in H2 17. Besides Fed rate hikes and quantitative tightening the US Treasury will likely soon begin to drain liquidity from the market, when a solution to the debt limit issue is found. US Treasury exhausts its 'extraordinary measure' possibly early autumn so Congress must either lift or suspend the debt limit soon to avoid a US government default. As we expect a deal to be reached eventually (although most likely not until very close to the deadline whenever it precisely is), the US Treasury will likely begin to rebuild its cash buffer (which US Treasury aims at USD150-450bn) in late Q3 or in the beginning of Q4 this year, thus draining dollars from the system.

As the Fed may be too optimistic about its ability to shrink its balance sheets, we see a risk of the start of an unwarranted tightening of USD liquidity over the coming 3-12M depending on the timing of the start of the reduction. That should widen the EUR/USD XCCY basis and be a negative contributing factor for EUR/USD, especially now that 40% of the reduction is conducted by ceasing reinvesting mortgage backed securities

USD/JPY - 109.65

Most recent candlesticks pattern   : N/A

Trend                      : Down

Tenkan-Sen level              : 109.54

Kijun-Sen level                  : 109.59

Ichimoku cloud top             : 110.07

Ichimoku cloud bottom      : 109.98

Original strategy  :

Sold at 109.60, Target: 108.60, Stop: 109.95

Position :  - Short at 109.60

Target :  - 108.60

Stop : - 109.95

New strategy  :

Hold short entered at 109.60, Target: 108.60, Stop: 109.90

Position :  - Short at 109.60

Target :  - 108.60

Stop : - 109.90

Although the greenback staged a strong rebound after marginal fall to 108.82 and consolidation above this level would be seen, as long as 109.85-90 holds, mild downside bias remains for another retreat, below 109.20-25 would bring retest of said support but break there is needed to confirm recent decline from 114.37 top has resumed for further weakness towards 108.40-45 (1.618 times projection of 110.81-109.63 measuring from 110.35), however, price should stay well above previous chart support at 108.13. 

In view of this, we are holding on to our short position entered at 109.60. Above 109.85-90 would defer and prolong consolidation but only break of resistance at 110.35 would signal an intra-day low is formed instead, bring another bounce to 110.50, then towards said resistance at 110.81. 

Sunrise Market Commentary

• Rates: Markets ignore Fed
  The Fed tried to sooth markets by holding on to the blueprint of its future tightening cycle, but bond markets largely ignored this message. US yields crashed after weaker inflation readings and couldn't recover lost ground after the Fed meeting. US yield tested or broke below support levels. A confirmed break suggests a return to pre-Trump levels.
• Currencies: EUR/USD cannot take out resistance with a little help of the Fed
  EUR/USD tested key resistance after weak US inflation and retail sales, but made a U-turn following the FOMC meeting, completely erasing earlier gains. Bonds gave the FOMC decisions a cool reception, suggesting that the “FOMC” turnaround was largely technical-inspired and not driven by fundamental considerations.

The Sunrise Headlines

• In line with expectations, the Fed raised its target rate to 1-1.25%. The press statement contained few surprises as the FOMC is still convinced inflation will rise. The rate projections in the dot plot stayed the same, bar the 2019 projection which was lowered marginally. The Fed also announced details of winding down its balance sheet, which will start ‘relatively soon'.
• US equities ended mixed, with Nasdaq underperforming (-0.41%). Overnight, Asian stocks slumped. Oil touched the lowest level since November, below $47/barrel, as US gasoline supplies unexpectedly rose for a second week.
• The Aussie dollar jumped above AUD/USD 0.76 after an encouraging jobs report. Employment again surged in May, led by a rebound in full-time positions, sending the jobless rate to the lowest level in more than four years.
• New Zealand's dollar fell from near a four-month high after a report showed gross domestic product grew 0.5% Q/Q in Q1, less than the forecast of 0.7%. Y/Y growth printed at 2.5% compared to a consensus of 2.7%.
• The special counsel investigating Russia's interference in the '16 election is now expanding the scope of special counsel Mueller's investigation from Trump's associates to Trump himself, sources familiar with the inquiry reported.
• ECB Nowotny asked whether adopting an inflation range, rather than a specific target, would make more sense in a situation where price growth is low for a long time.
• The eco calendar today contains the Bank of England's rate decision and UK retail sales. In the US, industrial production and initial jobless claims data will be released this afternoon. Spain and France tap the market.

Currencies: EUR/USD Cannot Take Out Resistance With A Little Help Of The Fed

Dollar rollercoaster ride on data and FOMC

The dollar made a rollercoaster ride yesterday. Weak US inflation and retail sales pushed the dollar lower across the board. EUR/USD shot higher from about 1.12 to about 1.13, while USD/JPY dropped from 110.30 to just below 109. The FOMC hiked rates as expected, left its rate path virtually early unchanged and announced that the start of the balance sheet run-off would be “relatively soon”. It couldn't convince bond traders. Bonds only retraced very partially strong gains on the weak data. The dollar however made a full U-turn with EUR/USD back to 112 (close 1.1218). USD/JPY didn't completely erase losses, closing at 109.58 from 110.07 on Tuesday. We think that technical arguments played a role in the full retracement of EUR/USD's initial gains, as resistance could not be taken out (triggering profit taking).

Asian equities trade in negative territory overnight, but without sharp losses. Oil digests yesterday's big inventory-related price drop. USD/JPY tested the downside early on, but reverted to opening levels soon (109.60). EUR/USD traded uneventful in Asia around 1.1220.

The US calendar is well filled today. US production is expected at 0.2% M/M in May, albeit after a strong 1% M/M in April. More attention will go to business sentiment data of NY and Philadelphia. The NY measure may be slightly higher, while there is scope for a drop in the Philly Fed index given recent very high, unsustainable (?), levels. Jobless claims and NAHB housing market sentiment may be close to unchanged, but at high levels. We don't expect mixed data to give FX markets firm direction.

The dollar gained ground on the FOMC decision, even as US yields didn't move much higher. EUR/USD approached key resistance at 1.1300/66, but the test failed, keeping our hypothesis that the upside of EUR/USD is capped alive. We don't expect a sharp comeback of the dollar in the near term without distinctively better US growth and higher inflation readings. While markets decided to (largely) ignore the FOMC decision, we think they should at some point move in the Fed's direction. Therefore we favour EUR/USD to move lower in the 1.08/1.13 range, but a trigger is currently unavailable. We remain cautious on the upside in USD/JPY ahead of Friday's BOJ meeting. The pair might still go for a test of the 108.13 April low if equities correct lower. At least more signs of a bottoming out are needed to favour long USD/JPY longs.

Technical picture

The USD/JPY rally ran into resistance in early May. A mini sell-off pushed the pair below the previous top (112.20), making the short-term picture negative and driving the pair further down in the 108.13/114.37 range. There is no convincing sign of a U-turn yet.

Early May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and US political upheaval propelled EUR/USD north of the 1.1023 range top to a corrective top of 1.1323 early June. A higher low, higher high pattern developed, but the pair is digesting earlier gains and consolidates near the top. The Trump top/correction top at 1.1300/1.1366 is next strong resistance. USD sentiment will have be very negative to clear this hurdle. A return below 1.1023 would indicate that the upside momentum has eased.

EUR/USD: Failed test of 1.1300/66 resistance. Prefer to see EUR/USD moving deeper in 1.08/1.13 range, but trigger is not available

EUR/GBP

Sterling likely to remain weak

The Bank of England reconvenes today to decide on its the policy rate and the direction of future policy decisions. Earlier this week, the May UK inflation rate rose more than expected, from 2.7% to 2.9%. Meanwhile, the labour market data came in lower than expected with weekly hourly earnings (excl. bonuses) rising only 1.7% compared to a consensus forecast of 2%. On balance, UK consumers are thus losing purchasing power. The combination of the latest sterling depreciation, the evidence of the pass through of sterling to CPI, the potentially weaker economic growth and lower wage inflation suggest that inflation might by higher in the short term and potentially lower in the longer term. This lowers the chance of UK inflation overshooting the BoE target in the longer run and therefore weakens the need for the BoE to hike rates. In addition, political uncertainty remains elevated. A moderately dovish adjustment to the language and guidance is possible and would buy some time until the August meeting when the new inflation projections are available. By then, the political situation could possibly have become clearer as well.

Sterling began and ended the day yesterday at around the same level compared to the dollar (around 1.2750 for cable) and to the euro (around 0.88 EUR/GBP).

From a technical point of view, EUR/GBP broke above the 0.8774 resistance and tested the 0.8854 area (2017 top) on Friday. A real break didn't occur. A retest of that area is possible. A break beyond would open the way to the 0.90 area. A return below the 0.8655 correction low would be an indication that the pressure on sterling is easing

EUR/GBP: first test of 2017 top rejected, but sterling remains in the defensive

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