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Sunrise Market Commentary

• Rates: Upcoming Fed meeting will keep investors sidelined
  Today's eco calendar becomes more interesting with German ZEW and US NFIB small business optimism, but we don't expect them to influence markets ahead of the Fed meeting. Risk sentiment will remain key for trading, but we think the Bund and US Note future will remain within established ranges.
• Currencies: USD holds stable going into the FOMC decision
  The dollar was slightly in the defensive yesterday as the tech equity correction weighed. Sterling tested recent lows against the euro and the dollar as political uncertainty persisted. Today's data will only be of second tier importance for USD trading. We assume investors won't be too much USD short going into the FOMC meeting.

The Sunrise Headlines

• US technology stocks were under further pressure despite a late recovery from the day's lows. Nasdaq ended 0.5% lower while losses on other US indices remained small. Overnight, most Asian stock markets eke out small gains.
• EMU finance ministers and the IMF are likely to strike a compromise on Greece on Thursday, paving the way for new loans for Athens while leaving the contentious debt relief issue for later, officials said.
• The US Treasury Department unveiled a sweeping plan to upend the country's financial regulatory framework, which, if successful, would grant many items on Wall Street's wishlist.
• An attempt to revive formal Dutch coalition talks on a four-party tie-up involving the Greens broke down. Talks collapsed over immigration policy, as they did in a previous bid four weeks ago.
• Theresa May has apologised to Conservative MPs for her election campaign that left her without a Commons majority and facing new Tory divisions on Europe, declaring: “I got us into this mess and I'm going to get us out of it.”
• The Bank of Canada will assess whether it needs to keep interest rates at near-record lows as the economy continues to grow, BoC Wilkins said, raising the prospect that a rate hike could come sooner than anticipated. CAD profited.
• Today's eco calendar is interesting with the German ZEW survey, UK (CPI) and US (PPI) price indicators and US NFIB small business optimism. The Netherlands, Italy and the US supply the market while ECB Weidmann speak

Currencies: USD Holds Stable Going Into The FOMC Decision

Dollar holding tight ranges ahead of the Fed.

Yesterday, the tech-driven equity correction and declining European political risk were the drivers for FX trading. Negative risk sentiment weighed slightly on USD/JPY. The pair struggles not to fall back below 110 (close at 109.95). EUR/USD traded sideways, as more signs of European political stability protected the downside of the single currency and counterbalanced negative global risk sentiment. EUR/USD finished the day at 1.1203.

Overnight, Asian equities recoup part of the yesterday's losses as the US driven tech correction eases. We didn't see high profile news in Asia to guide trading. USD/JPY tries to regain the 110 barrier. EUR/USD lost a few ticks and is changing hands in the 1.1190 area. Yesterday evening, Bank of Canada Deputy Governor Carolyn Wilkins spoke surprisingly hawkish. She indicated that the BOC is pondering the need of a rate hike as the economy is picking up. CAD/USD dropped from the 1.3470 area to the low 1.33 area and trades currently at 1.3285.

Today, the eco calendar is modestly interesting, with the German ZEW investors sentiment and the US NIFB small business confidence and the PPI's. German ZEW economic sentiment is expected to improve further as the financial and economic conditions in Germany and EMU remain constructive. The impact on FX is mostly limited. US NFIB small business confidence is expected stable at a high level 104.5. US PPI is expected to slow down to 0.0% M/M and 2.3% Y/Y (from 2.5%). A weak figure might cause temporary nervousness but with the CPI data and the Fed policy decision scheduled tomorrow, a big (negative) reaction of the dollar is unlikely. US equity futures suggest that the equity correction is petering out. A less fragile risk sentiment might be slightly USD supportive. The hearing of Attorney General Jeff Session before the Senate is a wildcard. Investors will today mainly look forward to the FOMC meeting. On Friday and Monday, a cautious dollar comeback petered out as risk sentiment turned negative. Even so, the market looks reluctant to be overall USD short going into tomorrow's Fed decision. If the risk-off correction eases, the dollar might strengthen modestly

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.

Earlier in 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 initially reached a short-term correction top at 1.1268. There was a minor break after disappointing US payrolls, but no sustained followthrough 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: Off the recent highs, but minor follow-through losses

EUR/GBP

Sterling sell-off to take a breather?

Sterling faced new selling pressure yesterday as political uncertainty after the Conservative election defeat remained high. EUR/GBP started a gradual, but protracted intraday uptrend and set a minor new 2017 top in the 0.8865 area. Cable dropped to the 1.2660 area. The sterling decline slowed during the US trading session as both GBP/EUR and cable met technical support, but there was no sign of any rebound yet. EUR/GBP closed the session at 0.8850. Cable finished the day at 1.2659.

UK price data will be published today. Headline inflation is expected stable at 2.7% Y/Y. Core inflation is expected to decline from 2.4% Y/Y to 2.3% Y/Y. We don't expect the inflation data to be of major importance for sterling trading. The BoE will keep a cautious tone as political uncertainty dominates. If anything, weaker than expected data will have slightly more impact than above-consensus data. Politics will remain the main driver. The huge differences on the Brexit approach in the conservative party aren't solved at all. Even so, after yesterday's internal debate, we have the impression that a resignation of May isn't imminent yet. This might temporary ease the pressure on sterling. However, the picture remains fragile.

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

Download entire Sunrise Market Commentary

GBP/USD - 1.2682

Most recent candlesticks pattern   : N/A

Trend                                 : Near term down

Tenkan-Sen level                 : 1.2668

Kijun-Sen level                    : 1.2704

Ichimoku cloud top              : 1.2807

Ichimoku cloud bottom        : 1.2724

New strategy  :

Look to sell again higher

Position : -

Target :  -

Stop : -

As the British pound has recovered after holding above indicated support at 1.2635, retaining our view that further consolidation would be seen and test of the Kijun-Sen (now at 1.2704) cannot be ruled out, above there would bring corrective bounce to 1.2735-45, however, still reckon upside would be limited to 1.2780 and price should falter below 1.2805-10, bring another decline later.

Below said support at 1.2635 would confirm recent decline has resumed for weakness to 1.2616 (previous resistance turned support) and possibly towards 1.2575-80 but reckon downside would be limited to 1.2550. As near term outlook is mixed, would be prudent to stand aside for now.

EUR/USD - 1.1198

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 1.1194

Kijun-Sen level                  : 1.1211

Ichimoku cloud top             : 1.1218

Ichimoku cloud bottom      : 1.1197

Original strategy  :

Sold at 1.1230, Target: 1.1130, Stop: 1.1240

Position : - Short at 1.1230

Target :  - 1.1130

Stop : - 1.1240

New strategy  :

Hold short entered at 1.1230, Target: 1.1130, Stop: 1.1240

Position : - Short at 1.1230

Target :  - 1.1130

Stop : - 1.1240

As the single currency retreated after faltering below indicated resistance at 1.1237, retaining our view that consolidation below this level would be seen and as long as said resistance holds, bearishness remains for weakness to 1.1180, break there would signal the rebound from 1.1166 has ended, bring retest of this level but below there is needed to extend the fall from 1.1285 top for retracement of early upmove to 1.1145-50 and then towards 1.1120, however, support at 1.1109 should hold from here.

In view of this, we are holding on to our short position entered at 1.1230. Only above 1.1265-70 would abort and bring retest of 1.1285, only break there would revive bullishness and confirm recent upmove has resumed and extend further gain to previous chart resistance at 1.1300, break there would encourage for headway to 1.1340-45 and later towards chart point at 1.1366.

USD/JPY - 110.01

Most recent candlesticks pattern   : N/A

Trend                      : Down

Tenkan-Sen level              : 109.97

Kijun-Sen level                  : 109.98

Ichimoku cloud top             : 110.37

Ichimoku cloud bottom      : 110.10

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

Although the greenback slipped to 109.63 yesterday, dollar needs to penetrate previous support at 109.38 to signal the rebound from last week’s low of 109.11 has ended at 110.81 and bring retest of this level. A drop below there would confirm recent decline has resumed for further fall to 109.00, then 108.75-80, however, near term oversold condition would limit downside and reckon 108.50 would hold.

If said support at 109.38 continues to hold, then further consolidation is in store and another bounce to 110.35-40 cannot be ruled out, however, upside should be limited to 110.60 and price should falter below 110.81. Only break of this resistance would signal the erratic rise from 109.11 low is still in progress for further gain to 111.00 and possibly 111.20-30 but price should falter well below resistance at 111.71, bring retreat later. As near term outlook is mixed, would be prudent to stand aside in the meantime.

Market movers today

We have some quite important data releases in Scandinavia. In Norway, Norges Bank will publish the Q2 Regional survey (its preferred gauge of economic activity), which should paint a benign picture of the economy. In Sweden, we expect CPIF inflation fell to 1.7% in May from 2.0% in April.

In Finland, focus is on the ongoing government crisis.

In the UK, CPI inflat ion data for May is released and analysts are looking for an unchanged print at 2.7% y/y. Higher inflation is the main reason why real wage growth has turned negative, which has slowed the economy. However, focus these days is mainly on the political uncertainty, see also Research UK: May stays (for now) due to Brexit uncertainties published this morning.

In Germany, we expect ZEW expectations rose slight ly to 21.1 from 20.6.

In the US, NFIB small business opt imism for May is due out , and consensus expects it to remain basically unchanged but we think it may decline, as Trump is having a hard t ime delivering on his economic promises (tax reform and deregulation).

Selected market news

Government crisis in Finland. Yesterday, Finland's government collapsed after one of the three coalition parties, the Finns Party, elected a new leader Jussi Halla-aho over the weekend. Halla-aho is known for his strong anti-immigrat ion at t itude and on Monday, the two governing coalition partners of the Finns Party, the Cent re Party and the NCP, together announced that there is no common ground for cooperat ion effectively leading to a government collapse. At the time of writ ing, it is too early to say whether the government collapse will lead to a snap election or if a new government will be formed.

US Treasury takes steps to easen regulation on banks. The Trump administ ration released its first proposal yesterday to roll back the Obama-era Dodd-Frank Wall St reet Reform Act, including a reduct ion in the scope of the federal bank stability exams, reduced oversight of the large financial institutions, regulatory relief for smaller banks and a loosening of new mortgage restrictions.

US tech share slump continues, despite slight recovery. Tech shares were down 4% on Friday and cont inued to be the weakest performing S&P sector yesterday, declining 0.8%. There were also some signs of the sell-off spreading to other sectors, with the overall S&P index ending the day 0.1% lower. However, some recovery were seen towards the end of the day, with the shares of several chip makers turning higher.

Theresa May stays as PM throughout Brexit negotiations

Theresa May's meeting with the influential 1922 committee yesterday went very well, as she left the meetings with applause. Theresa May told Conservative MPs that she will get the party out of the ‘mess' she created by calling for the snap election. She admitted mistakes were made during the campaign and that she was sorry for colleagues losing their seats.

May said she will stay as Prime Minister as long as the party wants her to – senior Conservative MPs said they will keep her at least until the UK formally exits the EU by the end of March 2019. The reason is that the 1922 committee does not want to increase political uncertainty further by throwing the party into a new leadership contest – political uncertainty is already high as the Brexit clock is ticking (March 2019 is a sharp deadline). Also, some of the MPs fear losing further seats in an early election.

Apparently, Gavin Barwell, a moderate Conservative and May's new Chief of Staff, received a very warm welcome by the committee.

Queen's speech postponed as no deal with DUP is reached yet

The Queen's Speech (a speech held by the Queen but written by the government laying out its legislative agenda for the election term) is postponed, as no deal between Theresa May and the Democratic Unionist Party (DUP) has been reached yet.

Brexit negotiations were set to start on Monday but they are likely to be postponed to later in June. There are hints that the UK will now accept the phased approach (first discuss the withdrawal terms, then the future relationship). Despite the wish for a softer Brexit from Scottish Conservatives (single market access more important than curbing immigration), Brexit Secretary David Davis has indicated that the government will proceed with its hard Brexit approach.

We still think it is difficult to say what the UK election result means in terms of Brexit. No doubt the minority government is weak, as it only has a few seats majority including DUP seats. Also, Theresa May remains weak despite her support at the meeting in the 1922 committee. It seems like the probability of both a softer Brexit and a clash/no deal Brexit have increased (so basically more probability mass in the two tails) and it will be important to follow how the negotiations proceed when they start later this month (not least how the perception is in the UK). The front page of The Telegraph suggests that Labour and the Conservatives may try to cooperate to get a softer Brexit (see tweet). A deal between the two parties will make it more likely for a deal to pass Parliament, but the two parties are not used to cooperating on big political issues.

• Europe rebounds after tech sell-off and UK election weighs on indices;
• UK CPI key ahead of Thursday's BoE decision;
• UK politics continues to drag on GBP which looks vulnerable to further downside.

European equity markets are expected to bounce back after a disappointing start to the week, with futures pointing to a slightly higher open on Tuesday.

The quiet start to the week in terms of news flow and economic data combined with the UK election result didn't provide much reason for optimism on Monday, although it was the sell-off in tech that appeared to be the greatest drag. Whether this is a temporary correction in a sector that has performed extraordinarily this year or something more is yet to be seen but nothing suggests to me that the latter is the case.

While the bulk of this week's key events kick of tomorrow with the Federal Reserve announcing its latest monetary policy decision – and most likely its second rate hike of the year – there are some notable releases today that could shake things up a little. UK CPI inflation for May will certainly be of interest ahead of Thursday's monetary policy decision, even if any change in interest rates appears extremely unlikely.

Given the political uncertainty hanging over the UK as it prepares to begin Brexit negotiations with the EU, it seems very unlikely that policy makers would deem it an appropriate time to add a rate hike into the equation unless it deemed it absolutely necessary. It's given the impression in the past that it's willing to look beyond any minor overshoots in inflation driven by a weaker currency and higher oil prices but with headline inflation seen remaining at 2.7% and core at 2.4%, you have to wonder how much more they'll stomach. Any surprise increases could give policy makers something to think about in the months ahead.

The political situation in the UK will likely remain at the forefront of people's minds today. While Prime Minister Theresa May appears determined to move past the humiliation of election night and get on with forming a government and beginning Brexit negotiations, and many lawmakers appear to support her in public at least, I think there's some way to go before people believe the country has anything that resembles stable leadership. While that uncertainty hangs over the country, the pound may continue to look vulnerable as it lingers around its post-election lows. A break below 1.26 against the dollar could trigger another decline in the pair, with 1.24 perhaps being its next notable level.

EUR/USD

Current level - 1.1192

The outlook here is negative below 1.1240 resistance, for a slide towards 1.1108 low. 

Profit-taking affects gold curbing silver and platinum

USD/JPY

Current level - 109.94

The intraday hurdle at 110.15 still caps the upside and the latter should provoke another slide towards 109.40 area. 

GBP/USD

Current level - 1.2655

The outlook is bearish, as the pair is struggling above 1.2610 major support area. A break through the latter will signal a dip to 1.2480. Initial intraday resistance lies at 1.2710.

Key Points:

• Crude oil trending within a relatively strong bearish channel.
• Price action has discovered some support and RSI is now trending higher.
• Watch for a breakout of the descending channel in the week ahead.

Global crude oil prices have seen plenty of volatility over the past month as the commodity has faced a variety of fundamental and technical pressures. In particular, an ongoing schism between Qatar and Saudi Arabia kicked off mounting speculation that the OPEC production cut agreement could be in trouble following sanction levying. Subsequently, WTI prices have dived of late with the oil benchmark having recently reached a low at $45.19 before rising to trade around its current level at $46.25 a barrel. However, it remains to be seen if crude prices can maintain some buoyancy in the face of a strongly descending channel.

Taking a look at the commodities current technical factors shows the decision that the market is presently facing. WTI's price action has been relatively strongly depressed over the past few weeks and has been, subsequently, trending lower within a strongly bearish channel. However, the commodity appears to have bounced back from a recent low and the RSI Oscillator is now rising away from oversold levels.

Regardless, crude oil is likely facing an uphill battle given the strength of the descending channel and the fundamental bearishness that is swirling around the commodity. However, on a brighter note, the recent low at $45.19 occurred within a key reversal area and price action is now trending towards the upper channel constraint. Subsequently, if crude prices can break above the $46.75 mark we are likely to see some gains back towards the $48.00 handle.

In fact, there are already some fundamentally bullish moves occurring with the latest U.S. Inventory figures showing declines and news that Sinopec (amongst other nations) is considering output drops to curb the current glut. In addition, lower Saudi exports are likely to have an impact on global markets in the coming week which adds to the sense that we may see a fundamental rise in prices.

Ultimately, there is still plenty of selling present and an ongoing bearish appetite for the commodity. However, it appears we might have currently plumbed the short term lows and the most likely scenario is now a move to the upside and towards $48.00 a barrel in the coming days. Therefore, monitor the WTI prices closely for a break above the descending channel to signal the start of the move.

Key Points:

• Long-term trend line is now in danger of being broken.
• A head and shoulders pattern is becoming apparent.
• Rate hike expectations could assist the near-term recovery.

The Loonie took a rather spectacular, if unexpected, plunge last week which has taken the pair back below its 100 day EMA. This has cast some doubt on earlier expectations of continued upsides and might even suggest that the long-term ascending trend line is in danger of being broken. However, the bulls out there shouldn't be too worried just yet as it looks as though we may have to wait some time for such a breakout to occur.

As shown below, whilst selling pressure has been notably intense – thereby raising concerns of a downside breakout – we still have some ways to go before the long-term trend is in danger of ending. Indeed, we may actually see a reversal quite shortly as a result of both the stochastics moving into oversold and the presence of a historical reversal zone. Regardless, even if we do see such a shift in momentum, we can't quite rule out seeing a breakout within the next few weeks.

Specifically, a reversal within the next session or two would suggest that the Loonie is well on the way to forming a long-term head and shoulders structure. Of course, we would likely need to see the pair recover to around the 1.3515 handle before really committing to the forecast but a rally up to this level is not entirely unreasonable given the chances of us seeing a US rate hike in the near-term.

If we do end up seeing the above forecasted recovery, the subsequent decline could be rather substantial. Firstly, the USDCAD could fall as low as the 1.3290 mark before even running into support courtesy of that long-term trend line as there is little in the way of support prior to this point. Nevertheless, this may only be half of the story as losses may even extend somewhere into the realm of the 1.30 handle. However, this would require breaking through the trend line which may require some bearish fundamentals.

Ultimately, the Loonie could be in for a bit of a bumpy ride in the coming weeks which could even result in the bears upending a yearlong trend. However, watch out for a near-term recovery before jumping into bed with those looking to send the Loonie lower as they may be hamstrung by rate hike speculation moving forward. Furthermore, pay particular attention to the technical readings as the pair moves to complete the final leg of the right shoulder as these could determine whether or not we see the final push back to the 1.30 handle or not.