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Sunrise Market Commentary

• Rates: Market moving towards the Fed?
  If the Fed holds on to the blueprint of its rate path and communicates about the start of the balance sheet run-off in H2 2017, it should confirm last week's technical bottoming out on US yield markets (failed tests 5-y (1.69%), 10-yr (2.17%) and 30-yr (2.82%) and could start a new up-leg in yields.
• Currencies: Can Fed put a floor for the dollar?
  Today's Fed decision might decide how the recent USD stalemate will be broken. The market is positioned for a soft Fedmessage. If the Fed sticks to its normalization approach, there might be room for a USD rebound. The sterling self-off eased yesterday after higher UK inflation data. Some further GBP rebound is possible, but we don't expect the move to go far.

The Sunrise Headlines

• Asian equities were mixed this morning, with solid gains in Australia and New Zealand offset by China, where markets weakened despite data showing resilience in retail sales (+10.7%) and industrial output (+6.5%).
• The dollar holds on to its two-day decline as traders seek clarity on US Fed's policy plans for further tightening and for balance sheet unwinding after today. Markets expectations on a rate hike today are at 97%
• WTI oil price fell to trade near $46 after the American Petroleum Institute said U.S. oil stockpiles increased last week.
• UK PM Theresa May is under growing pressure to abandon the hard Brexit as she tries to get a deal with the Northern Ireland's DUP. Time pressure is rising as negotiations with the EU are due to begin next Monday.
• Schaeuble and Macron yesterday both stated a reversal of Brexit is possible during entire negotiating period.
• Attorney general Sessions testified to lawmakers that he had not colluded with Russia during the '2016 presidential campaign. He also refused to elaborate on conversations with Trump concerning this issue and the Comey-firing.
• The main event on the eco-calendar today is the Fed's policy meeting. For the US, the CPI and retail sales are major releases,… but the timing ahead of the FOMC may dampen reactions.

Currencies: Can Fed Put A Floor For The Dollar?

Dollar discounting too much Fed softness?

Yesterday, USD/JPY gained only a few ticks as global equities recovered from the tech correction and as core bond yields rose a few basis points. EUR/USD held a tight range close to and mostly just north of 1.12 as there was little news to give direction and as investors awaited the Fed . EUR/USD finished the day at 1.1211. USD/JPY closed at 110.07.

Overnight, Asian indices are trading mixed despite yesterday's WS rebound. China underperforms, despite Chinese close to expectations. Oil struggles not to fall back to the recent lows (Brent at $48.30). USD/JPY is holding a tight range near 110. EUR/USD is going nowhere in the 1.12 area. Bank of Canada Governor Poloz said that the rate cuts have done their job, reinforcing the short squeeze of the CAD. USD/CAD dropped to the low 1.32 area.

Today, the US eco calendar is well filled. CPI Inflation (0.0% M/M and 2.0% Y/Y) and retail sales (0.1% M/M headline) are expected modestly. A negative surprise, especially in inflation, may cause some nervousness going into the FOMC decision and be a slightly USD negative intra-day. However, investors are unlikely to start a strong directional move just hours before the FOMC decision. The Fed will raise its policy rate by 25 bps. Markets will scrutinize the Fed rate cycle outlook (new dots), the Fed plans to reduce the balance sheet and the press conference of Fed's Yellen. (see fixed income part). A softening in the Fed stance is not excluded, but the median dot seem robust for 2017/18 and some risks exists for a slightly lower 2019 median. Markets might see the dots moving in the direction of the markets as a potential repeat of the 2015/16 scenario. Even so, our basic hypothesis is that both interest rate markets and the dollar discounted already enough Fed softness. We don't expect a sharp comeback of the dollar, but the Fed has to be surprisingly soft to trigger sustained USD losses . We maintain the working hypothesis that a break of EUR/USD above Trump highs (1.1300/66) remains difficult. Such a scenario might also be slightly supportive for USD/JPY. However, the yen was well bid of late. The reaction of equities is a wild card (will the Fed give some kind of soft warning on equity valuations?). Markets might also be cautious ahead of Friday's BOJ decision. We remain cautious on the USD/JPY upside

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. At the end of last week, the USD/JPY decline slowed, but 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. The pair reached a short-term correction top at 1.1268. There was a minor break after disappointing US payrolls, but no sustained follow-through gains occurred. The Trump top/correction top at 1.1300/1.1366 is next 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: Will topside be better protected after Fed decision?

EUR/GBP

Sterling sell-off slows, at least temporary

Sterling selling eased yesterday. Political uncertainty remains high, but the battle for Theresa May's political survival became less aggressive than it was over the previous days. Sterling started a bottoming-out process. Mid-morning, UK inflation (May) rose more than expected, from 2.7% to 2.9%. UK bond yields rose and sterling slightly regained ground. EUR/GBP dropped below 0.88 and closed the session at 0.8790. Cable rebounded to the mid 1.27 area.

UK labour market data will be published today. They will be overshadowed by political developments. Wage date might still have some impact on sterling. Especially soft AHE might convince markets that it will be very difficult for the BoE to raise rates anytime soon. On the political scene, May still tries to find support for a minority government. She also faces a growing number of calls for a soft Brexit, showing internal problems within her own conservative party. The political Gordian knot isn't solved yet. Yesterday, we indicated that the pressure on sterling might temporary ease, but the picture remains fragile.

From a technical point of view, EUR/GBP broke above 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 opens 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

Download entire Sunrise Market Commentary

EUR/JPY - 123.50

Recent wave: wave v of (C) ended at 94.12 and major correction in wave A has ended at 149.79

Trend: Near term up

New strategy :

Stand aside

Position: -
Target:  -
Stop:-

The single currency has remained confined within near term established range and further sideways trading is in store, whilst recovery to 124.10-20 cannot be ruled out, a break of 124.70-75 is needed to signal the retreat from 125.81 has ended, bring a stronger rebound to 125.00 but resistance at 125.31 should remain intact, bring retreat later.

On the downside, below indicated strong support at 122.56-63 would signal another leg of corrective decline from 125.82 top is underway for retracement of early upmove to 122.00, then towards 121.25-30 but oversold condition should limit downside and reckon latter level would remain intact, bring rebound later.

Our latest preferred count is that wave (ii) is ABC-X-ABC which ended at 123.33 and wave (iii) is unfolding with wave iii ended at 100.77, followed by wave iv at 111.57 and wave v as well as the wave (iii) has ended at 97.04, followed by wave (iv) at 111.43 and wave (v) has ended at 94.12 which is also the end of the larger degree v, this also implied the major wave (C) has also ended there, hence major correction has commenced from there with (A) leg unfolding in its lower degree wave c which has possibly ended at 145.69. Under this count, A-B-C wave (B) has commenced with A leg ended at 136.23, wave B at 143.79 and wave C has possibly ended at 149.79.

Our larger degree count is that the decline from 139.26 is wave (C) and is sub-divided into a diagonal triangle i-ii-iii-iv-v with wave i - 105.44, wave ii- 123.33, wave iii - 97.03, wave iv - 111.43, followed by the final wave v as well as the end of wave (C) at 94.12, this also mark the bottom of larger degree wave B. Under this count, major rise in wave C has commenced as an impulsive wave with minor wave III ended at 145.69, wave V is still in progress for further gain to 150.00. Having said that, this so-called wave V could well be the first leg of larger degree 5-waver wave C and this wave C should bring at least a retest of wave A top at 169.97 (July 2008).

AUD/USD – 0.7559

Recent wave: Wave 5 ended at 1.1081 and major correction has commenced for fall to 0.7000 and then towards 0.6500-10

Trend: Near term down

Original strategy :

Buy at 0.7500, Target: 0.7650, Stop: 0.7440

Position: -
Target:  -
Stop: -

New strategy :

Buy at 0.7500, Target: 0.7650, Stop: 0.7440

Position: -
Target:  -
Stop:-

As the Australian dollar has continued trading with a firm undertone, suggesting recent move from 0.7329 is still in progress and bullishness remains for this move to extend further gain to resistance at 0.7611 but break of latter level is needed add credence to this bullish count and encourage for subsequent upmove towards resistance at 0.7680, however, price should falter below chart point at 0.7750.

In view of this, we are looking to buy aussie on dips as 0.7500 should limit downside and bring another rise. Below support at 0.7457 would abort and suggest top is possibly formed, bring weakness to 0.7415-20 but price should stay well above key support at 0.7372, bring another rebound later.

On the 4-hour chart, the move from 0.8066 is the wave 5 with i: 0.8860, ii: 0.8315, wave iii is an extended move ended at 1.0183, iv: 0.9706 and wave v has ended at 1.1081 (also the top of entire wave 5). The subsequent selloff is the major correction which is unfolding as ABC-X-ABC and 2nd A leg has ended at 0.8848, followed by a-b-c wave B which ended at 0.9758, hence, 2nd C wave is now in progress and indicated downside target at 0.7000 and 0.6950 had been met, so further fall to 0.6710-20 cannot be ruled out.

Market movers today

Today's most import ant event is the FOMC meeting, which is one of the big meetings with updated projections and a press conference. Very much against consensus, we expect the Fed to stay on hold, as a data-dependent FED should wait at least one meeting to confirm the recent weakness is only temporary but we admit that the Fed may have painted itself into the corner given the very high expectations of a hike. Instead, we expect a big announcement on how it will proceed with reducing its balance sheet (‘quantitative tightening') and signalling a strong likelihood of a July hike. See more details here, "FOMC preview: Expectations are high but data do not justify a hike yet" , 12 June 2017.

In the US, the CPI inflation print for May is due out , which we estimate fell to 2.0% y/y form 2.2% y/y (core inflation was likely unchanged at 1.9%), so no help from the Fed here.

In the UK, look out for the labour market report due at 10:30 CET.

In Sweden, Prospera inflation expectations are due out .

In Norway, the very strong Regional Network Survey clearly indicates growth is higher than expected, see more Regional Network Survey: Norges Bank to remove rate cut probability, 13 June 2017.

Selected market news

Democratic law makers sue Trump. More than 190 Democrats in Congress sued US President Trump on Wednesday for profiting from business deals involving foreign governments without congressional consent , which would be in violation of US constitution. The suit involves the largest number of lawmakers ever to sue a US President , and is the latest in a series of legal efforts to get Trump to separate himself from his business interests. Other suits have been filed by private businesses and the at torneys general of Maryland and the District of Columbia.

Rising tensions in UK's Brexit department . The Department for Exiting the EU has seen two of its four ministers depart this week, just days before the Brexit negotiations with the EU are due to start , reportedly reflecting rising tensions with Prime Minister May (see Financial Times). Separately, French President Macron told May during her visit in Paris that the door remains open for the UK to remain in the EU, but that it will become increasingly difficult to go backwards as negotiations go on. According to May, the timetable for negotiations ‘remains on course'.

Tech stock rebound lifts overall indices. The S&P tech sector rebounded 0.9% yesterday after taking large losses on Friday and also trading in negative territory on Monday. This helped propel the overall S&P 500 index to a gain of 0.5%.

Chinese industrial output and retail sales steady in May. Chinese economic data released overnight showed an increase in industrial production of 6.5% y/y in May, in line with the increase seen in April and slightly higher than the 6.4% expected. Retail sales were in line with expectations and April's number at 10.7% y/y

The U.S. Federal Reserve's monetary policy meeting is coming up later today, and the markets are likely to remain subdued into the event. The short-term interest rates are expected to rise by 25 basis points, but the markets will be focusing on what forward guidance. Following the rate decision, there will be a press conference by Janet Yellen along with fresh economic forecasts as well.

In the UK, economic data will include the monthly jobs report where wages will be closely scrutinized, especially after inflation surged 2.9%. This will possibly put the BOE in a tight spot if wages fail to rise.

EURUSD intraday analysis

EURUSD (1.1214): EUR/USD continues to consolidate within a rising wedge pattern, and the price action suggests a modest upside in the making. Price is likely to test 1.1260 - 1.1245 where resistance could be forming. This near-term upside is also validated by the doji close that has formed. Following a retest, a reversal from this resistance level could keep the EURUSD biased to the downside. The support at 1.1100 followed by 1.1000 is most likely to be tested in the near term.

GBPUSD intraday analysis

GBPUSD (1.2747): The British pound posted a recovery yesterday as the inflation data showed that the UK's consumer price index rose 2.9%, more than expected. With the jobs and BoE meeting scheduled this week, the modest recovery is likely to see GBPUSD test the resistance level that could be developed at 1.2800. The downside remains intact with GBPUSD likely to resume the declines towards 1.2600 to complete the downside target from the head and shoulders pattern. On the 4-hour chart, resistance zone is seen at 1.2800 - 1.2767.

USDJPY intraday analysis

USDJPY (110.04): The USDJPY slipped back below 110 after testing the resistance level briefly near 110.79. This higher low that is formed is likely to see price action push modestly higher. A break out above 110.79 is needed for USDJPY to aim for 112.00 - 111.70 resistance level. Alternately, if USDJPY slips below 110.00, then expect the near term to test the support level at 109.50 - 109.25 which was previously tested. The downside bias will increase only on a decline below this support level.

Weekly 


   

•    Last Candlesticks pattern: Shooting star 
   
   

•    Time of formation: 13 Mar 2017 
   
   

•    Trend bias: Down



Daily



   

•    Last Candlesticks pattern: Bearish engulfing pattern 
   
   

•    Time of formation: 16 Feb 2017 
   
   

•    Trend bias: Near term down




 

Although the Australian dollar did fall to 81.80 last week, as the pair has rebounded after failing to penetrate this support, suggesting further consolidation would be seen, however, reckon upside would be limited to 83.85-90 and bring another decline later, below said support at 81.80 would signal the rebound from 81.50 has ended, bring retest of this level first. A drop below this level would extend recent decline from 88.15 top to support at 81.10-15, however, near term oversold condition should limit downside and reckon 80.00 psychological support would hold from here, bring rebound later.

On the upside, expect recovery to be limited to the lower Kumo (now at 83.45) and bring another decline. Above 83.85-90 would risk another bounce towards indicated resistance at 84.55 but only a break above this level would abort and suggest low has been formed instead, risk a stronger rebound to 85.00-10, however, another indicated previous resistance at 85.75 should remain intact, bring another decline later. 


Recommendation: Hold short entered at 83.65 for 81.65 with stop above 84.00.

On the weekly chart, as aussie has rebounded after failing to penetrate support at 81.80 and a white candlestick was formed, suggesting further consolidation above recent low at 81.50 would be seen, however, reckon upside would be limited to 83.40-50 and 83.85-90 should hold, bring another decline later, below 81.80 would bring retest of 81.50. A drop below this level would extend the fall from 88.15 top to support at 81.10-15, a weekly close below there would retain bearishness and suggest the rise from 72.50 has ended, then further fall to 80.50 and possibly psychological support at 80.00 would follow.

On the upside, expect recovery to be limited to 83.40-50 and bring another decline. Only a weekly close above resistance at 84.55 would suggest low is formed instead, bring a stronger rebound to 85.00, then towards resistance at 85.75 but only break there would abort and signal low is formed instead, bring further subsequent gain to 86.00 and then 86.50-60, however, price should falter below resistance at 87.50.

The growing anticipation that the Federal Reserve may raise interest ratesthis evening has offered minimal support to the Greenback during early trading with prices edging below 97.00 as of writing. With the probability of a rate hike in June’sFOMC meeting currently at 99.6%, investors will most likely direct their attention towards the FOMC statement and economic projections for clarity on future rate hike timings.

It should be kept in mind that the recent weakness in US inflation has not only sparked concerns for the health of the US economy but also created uncertainty around the Federal Reserve’s policy plan for 2017. A dovish tone in the pending FOMC press conference coupled with a downward drift in the “dot plot” could fuel the Dollar bear rally as questions are raised over the Fed’s ability to hike rates twice more this year. It will also be interesting to see if the weak first quarter GDP Print for 2017 causes any change to the economic projections.

Focusing on the Greenback, the currency has had a turbulent year.I feel the outlook remains tilted to the downside as political uncertainty in Washington and soft economic data weighs heavily on the currency. With a Dovish hike on the cards in today’s meeting, the Dollar Index could find itself under renewed selling pressure. From a technical standpoint, the breakdown below 97.00 may entice bears to target 96.50.

UK Jobs report in focus

The Pound popped higher on Tuesday as currency investors remained cautiously optimistic over a softer Brexit following last week’s UK election outcome, resulting in a hung parliament. A vulnerable US Dollar played a role in the upside with short-term bulls sending the GBPUSD towards the 1.2775 resistance. Although the political uncertainty in the UK and pending Brexit negotiations are stillin focus, much attention will be directed towards the UK jobs report this morning.

While Britain’s unemployment rate continues to improve, the shrinking average weekly earnings remain a cause for concern and will be heavily scrutinized by investors on release. If average earnings fail to build momentum, consumers may feel the heat especially after inflation has hit a four-year high at 2.9% in May. With rising consumer prices, political uncertainty and ongoing Brexit woes all adding to the messy mix, it will be interesting to see how the Bank of England responds in Thursday’s MPC meeting.

Sterling/Dollar is bearish on the daily charts with the dynamic 1.2775 resistance acting as a level of interest. Repeated weakness below 1.2775 could encourage a further decline towards 1.2600.

report showed an unexpected increase in US Crude stockpiles last week which fueled oversupply fears. The downside was complimented by news of Nigeria and Libya pushing OPEC’s output higher last month for the first time this year. With oversupply woes still a recurring theme, and investors becoming increasing skeptical over the effectiveness of the production cuts led by OPEC and Russia to rebalance the markets, WTI remains vulnerable to further selling pressure. US Shale remains a threat to the OPEC deal with markets observing how the cartel reacts when the surging output from the US seizes market share from other OPEC members.

On the daily charts, WTI Crude has created consistently lower lows and lower highs which fulfills the prerequisites of a bearish trend. The downside momentum should encourage sellers to send prices towards $45.50. In an alternative scenario, a technical bounce towards $46.50 could attract bears to instigaterenewed rounds of selling with $45.50 acting as a first target.

Commodity spotlight – Gold

The looming US interest rate hike this evening has had little impact on Gold with prices rebounding towards $1270 during early trade. Although this zero-yielding metal remains dictated by US interest rate expectations, speculations of a dovish hike in June have supported prices. With risk aversion from Brexit developments and political uncertainty in the US likely to accelerate the flight to safety in the medium to longer term, Gold bulls could receive enough encouragementto keep the metal above $1260. From a technical standpoint, the daily bullish outlook on Gold remains valid as long as prices remain above $1260.

Weekly
    •    Last Candlesticks pattern: Shooting doji
    •    Time of formation: 20 Feb 2017
    •    Trend bias: Sideways

Daily
    •    Last Candlesticks pattern: Bearish engulfing pattern
    •    Time of formation: 21 Mar 2017
    •    Trend bias: Near term down



Aussie has maintained a firm undertone after staging a strong rebound from 0.7372 earlier this month, adding credence to our view that a temporary low has been formed at 0.7329 last month, hence consolidation with upside bias remains for the rebound from there to extend gain to another previous resistance at 0.7611, having said that, aussie needs to break this level to signal the fall from 0.7750 top has ended and bring subsequent rise towards resistance at 0.7680 but price should falter below chart resistance at 0.7750.

On the downside, whilst initial pullback to 0.7500 cannot be ruled out, reckon the Tenkan-Sen (now at 0.7470) would limit downside and bring another rise later. Below 0.7415-20 would defer and risk weakness towards said support at 0.7372 which is likely to hold from here. Only below said support at 0.7372 would revive bearishness and suggest the rebound from 0.7329 has ended, bring retest of this level, break there would extend recent fall from 0.7750 top to 0.7300 and possibly 0.7250-60 but reckon downside would be limited to 0.7200-10 and price should stay well above indicated previous chart support at 0.7158.


Recommendation: Buy at 0.7475 for 0.7675 with stop below 0.7375.



On the weekly chart, last week’s strong rebound did form a white candlestick, adding credence to our view that low has been formed at 0.7329, hence consolidation with upside bias remains for further gain towards previous resistance at 0.7611, however, break there is needed to signal the fall from 0.7750 has ended at 0.7329, bring subsequent rise towards resistance at 0.7680, having said that, price should falter below said resistance at 0.7750.

On the downside, although pullback to 0.7500 cannot be ruled out, reckon the Tenkan-Sen (now at 0.7470) would limit downside and bring another rebound. A weekly close below the Kijun-Sen (now at 0.7454) would risk weakness to 0.7400 but only break of said support at 0.7372 would suggest the rebound from 0.7329 has ended and revive bearishness for retest of this level. A break there would extend recent decline from 0.7750 to 0.7290-00 and possibly towards 0.7230, however, downside should be limited to 0.7200 and price should stay well above previous support at 0.7158, risk from there is seen for a rebound to take place later. 

USD/CHF - 0.9681

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9682

Kijun-Sen level                    : 0.9682

Ichimoku cloud top                 : 0.9699

Ichimoku cloud bottom              : 0.9687

Original strategy :

Sold at 0.9720, Target: 0.9620, Stop: 0.9720

Position : - Short at 0.9720

Target :  - 0.9620

Stop : - 0.9720

New strategy  :

Hold short entered at 0.9720, Target: 0.9620, Stop: 0.9720

Position : - Short at 0.9720

Target :  - 0.9620

Stop : - 0.9720

Dollar’s retreat after meeting resistance at 0.9728 late last week has retained our bearishness and consolidation with mild downside bias remains for weakness to 0.9657 support, however, break of 0.9640 is needed to signal the rebound from 0.9613 has ended, bring retest of this level first. A break below this level would extend recent decline to 0.9600-05 (50% projection of 1.0100-0.9692 measuring from 0.9808) later.

In view of this, we are holding on to our short position entered at 0.9720. Above said resistance at 0.9728 would abort and signal a temporary low has been formed at 0.9613 last week instead, bring a stronger rebound to 0.9761 resistance but price should falter below resistance at 0.9808.

Daily Pivots: (S1) 0.8763; (P) 0.8807; (R1) 0.8834; More...

Despite edging higher to 0.8865, EUR/GBP cannot sustain above 0.8851 resistance and retreated. Intraday bias is turned neutral for some consolidation. At this point, we'd expect 0.8639 support to hold and bring another rise. Firm break of 0.8851 will pave the way to retest 0.8304 high. . At this point, there is no clear sign of larger up trend resumption yet. Hence, we'll be cautious on topping around 0.9304. However, break of 0.8639 support will now indicate near term topping and bring deeper pull back to 55 day EMA (now at 0.8615) and below.

In the bigger picture, price actions from 0.9304 are viewed as a medium term corrective pattern. The leg from 0.9304 should have completed after testing 0.8332 structural support. But it's too early to say that larger rise from 0.6935 is resuming. Rejection from 0.9304 will extend the consolidation with another falling leg. Meanwhile, firm break of 0.9304 will target 0.9799 (2008 high). In case of another decline, we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside and bring rebound.