The British pound tumbled during the Asian morning Monday, following media reports over the weekend regarding Brexit and immigration control, as well as the prospect of a second Scottish independence referendum. Firstly, according to the Telegraph, PM May is expected to announce that EU citizens who travel to Britain after the triggering of Article 50 in March will no longer have the automatic right to stay in the UK permanently. This is a significant development because prior to this, the UK was expected to keep the free movement of people principle intact until it exited the EU in roughly two years. In our view, the fact that PM May wants to take full control of Britain's borders as soon as when the exit negotiations begin, confirms that the government's top priority is immigration and not access to the single market, and enhances our view that we may be headed for a "hard Brexit". The other story over the weekend that may have weighed further on sterling was that the Scottish National Party raised the issue of a second Scottish independence referendum at a private meeting with May's administration last week. Although this prospect is not new, the report added that according to government sources May could agree to a new Scottish vote, but on condition it is held after the UK departs from the EU.

Coming on top of Q4 GDP data showing falling business investment and a BoE that appears to be in absolutely no rush to raise rates, these fresh signals of a "hard Brexit" and the risk of another Scottish referendum amplify our view that the broader outlook for GBP remains negative. What's more, given the uncertainty surrounding fiscal policy in the US, we would avoid exploiting GBP weakness through Cable. Instead, our favorite proxy for any potential sterling softness in the foreseeable future is still GBP/JPY, considering that the looming political risks in Eurozone could strengthen the yen due to its safe haven status.

GBP/JPY traded lower on Friday to break below the support (now turned into resistance) territory of 140.00 (R1) and the upside support line drawn from the low of the 16th of January. The rate slid further during the Asian morning Monday, before finding fresh buy orders marginally above the 138.90 (S1) area and subsequently rebounding somewhat. The fact that the rate has exited a triangle formation to the downside confirms that the short-term outlook of the pair is negative. As such, even though the latest rebound may continue for a while and perhaps test the 140.00 level (R1) as a resistance, we would expect the bears to take control again at some point and push the price lower for another test at 138.90 (S1). A clear break below that zone could set the stage for further declines towards the 138.50 (S2) territory.

Today's highlights

During the European day, the data calendar is very light. The only noteworthy indicator we get is Eurozone's final consumer confidence index for February.

In the US, durable goods orders for January are due to be released. The forecast is for the headline rate to have rebounded from previously, while the core figure is expected to have risen for the 5th consecutive month, indicating that despite some softness in civilian aircraft orders, the underlying trend in durable goods continues to be to the upside. The case for solid durable goods orders is supported by the nation's ISM manufacturing PMI for the month, where the new orders sub-index, already at an elevated level, rose for the 5th straight month. Something like that could bring USD under renewed buying interest.
EUR/USD traded lower on Friday, falling below the support (now turned into resistance) barrier of 1.0600 (R1). Given that the pair has resumed its downfall after testing as a resistance a short-term downtrend line taken from the highs of the 6th of February, we believe that the short-term bias remains negative. Strong US durable goods orders today could be the catalyst for further declines, perhaps for an initial test of our 1.0530 (S1) support level. Nevertheless, with not much else on the economic calendar today and with investors focus being on Trump's address (see below), we would expect any declines to stay more or less limited near the 1.0500 (S2) psychological barrier.

We have only one speaker scheduled for today: Dallas Fed President Robert Kaplan.

As for the rest of the week

On Tuesday, the highlight of the day will be US President Trump's address to a joint session of Congress. Following Trump's recent pledge that he is going to announce a "phenomenal" plan on tax reform within the next weeks, market participants will be on the edge of their seats for any details regarding the new administration's fiscal plans. As for the US data, we get the 2nd estimate of Q4 GDP.

On Wednesday the Bank of Canada rate decision will take center stage. The forecast is for the Bank to remain on hold. In such a case, market focus will quickly turn to the statement accompanying the decision for any forward guidance, as there is no press conference by Governor Poloz. Given the progress in economic data since the latest BoC meeting, the tone of the statement could remain neutral overall. As for the economic data, we get Australia's GDP for Q4, Germany's preliminary CPI for February, and the UK's manufacturing PMI for the same month. What's more, we get personal income and spending data for January from the US, as well as the core PCE price index for that month.

On Thursday, Eurozone's preliminary CPI for February and Canada's GDP data for Q4 are coming out.

On Friday, during the Asian morning, we get Japan's CPI figures for January. During the rest of the day, we get the UK services PMI for February, and from the US, the ISM non-manufacturing PMI for the same month.

'At 1.06 versus the U.S. dollar, the euro is undervalued.' - Mark Haefele, UBS Wealth Management (based on Bloomberg)

Pair's Outlook

The common European currency started the week higher against the US Dollar than the Friday's closing price. With a new week the new levels of significance have been calculated, and the weekly PP at 1.0562 began to provide support to the currency exchange rate. As a result of the before mentioned facts, the currency pair began a surge. The Euro is set to surge up to the closest notable resistance level at 1.0591, which is represented by the 55-day SMA. The simple moving average is likely to hinder the pair's surge, if not even reverse it.

Traders' Sentiment

SWFX traders have decreased their bullish sentiment, as 52% of open positions are long on Monday, compared to 54% on Friday. Meanwhile, 61% of trader set up orders are set to sell the Euro.

'The GBP slides this morning against all major currencies after the Times reports that UK Prime Minister Theresa May is preparing for Scotland to potentially call an independence referendum in March to coincide with triggering of Article 50. The referendum may be allowed but only after the UK leaves the EU.' – Nordea Markets (based on PoundSterlingLive)

Pair's Outlook

Friday ended with the Cable erased most of that week's gains, with the bearish momentum persisting through the weekend. The main gauge of such bearish developments were concerns over another possible Scottish independence referendum; Brexit turmoil keeps weighing on the Pound. The GBP/USD pair still faces a tough demand cluster around 1.24, which is expected to limit the losses as it has done through all of February so far. A close below 1.2380 could lead to the Sterling slumping back to 1.20, with political factors driving this weakness. However, a close above still brings hope for a potential recovery towards at least 1.27.

Traders' Sentiment

There are 60% of traders holding long positions today, while 53% of all pending orders are to sell the British Pound.

'Our basic stance is that the correction in the USD/JPY will halt at ¥110-115, but we should be paying closer attention to downside risk at least for the short term.' – Deutsche Bank (based on FXStreet)

Pair's Outlook

The less favourable for the US Dollar scenario prevailed on Friday, causing the pair to edge lower once again. Nevertheless, the USD/JPY pair managed to retain its position above the 112.00 handle, which in turn is supported by the 100-day SMA, the lower Bollinger band and the weekly S1, while the 111.75 mark also acts as a tough psychological support. Consequently, another bearish development is unlikely, despite technical indicators suggesting so. The Greenback could easily reach the 113.00 level today, should the fundamentals provide a sufficient boost later during the day; however, disappointing data could still cause a downside reaction.

Traders' Sentiment

Market sentiment remains bullish, now at 61% (previously 54%). Meanwhile, the portion of buy orders edged down from 67 to 59%.

'The biggest driver of gold has been the relatively weak U.S. dollar.' – Jiang Shu, Shandong Gold Group (based on Reuters)

Pair's Outlook

During the last trading session the yellow metal stopped the jump, which was the result of a breakout out of a triangle pattern. The surge stopped at the 1,260 level, where the 200-day SMA was and still is located at. As a result with a new week a decline has begun, and the bullion's price is set to decline to the 1,248.96 level, where the 50.00% Fibonacci retracement level is located at. In addition, the Fibo is also supported by the newly calculated weekly PP, which is located at the 1,247.55 level.

Traders' Sentiment

Traders remain long on the metal, as 54% of SWFX open positions are long. In addition, 61% of trader set up orders are set up to buy the bullion.

'Markedly weakening consumer fundamentals, likely mounting caution over making major spending decisions, and elevated house price to earnings ratios are likely to weigh down on house prices.' - Howard Archer, HIS Markit

Official data released on Friday revealed that the number of mortgage approvals in the United Kingdom jumped to a 12-month high in January. The British Bankers' Association reported mortgage approvals rose to 44,657 in January, compared with December's 43,581 reading. The reported month's figure was the highest since January a year ago, when mortgage approvals climbed to 45,794. Furthermore, the BBA reported its gross mortgage borrowing surged 6.3% year-over-year to £13.8B in January, while net mortgage borrowing was 2.4% higher in the same month in 2015. In addition, remortgaging approvals grew nearly 16%, being mainly influenced by record-low interest rates in the UK. Moreover, the unsecured consumer borrowing increased to an annually adjusted rate of 6.7% in spite of weaker retail sales. Consumer credit growth remained mainly driven by an increase in personal loans amid slowdown in credit card loans.

Overall, the Bank of England is likely to observe closely tendencies of borrowing more as household income is set to terminate growth this year.

'The relative stability in core measures suggests that underlying inflation could be basing, but that level of excess supply remain important preventing an increase in inflationary pressures.' - Charles St-Arnaud, Nomura International Plc

Canadian consumer prices advanced more than expected in January, official figures revealed on Friday. Statistics Canada reported its headline Consumer Price Index surged 2.1% year-over-year, after rising just 1.5% in December. On a monthly basis, the index jumped 0.9% in January, following the preceding month's 0.2% fall and surpassing analysts' expectations for a 0.3% rise. In terms of annual inflation, gasoline prices contributed most, climbing 20.6% on a yearly basis in January, the strongest rate since September 2011. In addition, higher energy prices forced transport costs to grow at an annualised pace of 6.3%, while food prices posted a decline of 2.1% compared with a 1.3% drop registered in 2015, though still managing to advance 0.6% month-on-month in January. In the meantime, shelter and goods prices ticked 2.4% and 2.0% higher over the year, whilst services-industry prices edged up 2.3%.

Nevertheless, further increase in inflation is set to rule out any short-term monetary easing by the BoC amid raising uncertainty related to both the US and domestic economic outlooks.

Sunrise Market Commentary

• Rates: Red alert in German and US 10-yr yield
  The German and US 10-yr yields reached key support levels around 0.17% and 2.3% respectively. From a technical point of view, these levels are necklines of a triple top formation. US President Trump's speech on Tuesday night will need to fiscally dovish to prevent a break lower in the US. In Germany, collateral scarcity might be interfering with reality.
• Currencies: Dollar mixed ahead of Trump. USD/JPY nearing key support
  On Friday, USD traders received mixed signals from other markets. USD/JPY is drifting toward the range bottom as markets await clear signal from Trump on fiscal policy. EUR/GBP rebounded again north of the 0.8450 reference. Sterling (Cable and EUR/GBP) still shows no clear trend.

The Sunrise Headlines

• US equities erased losses thanks to a last hour surge which left the three main indices with marginal gains and new all-time closing highs (S&P/Dow). Asian equities trade modestly down with Japan underperforming (-0.9%).
• US Treasury Secretary Mnuchin said Trump's upcoming budget won't touch entitlements, and will focus on ways to produce LT growth by reducing taxes. The tax-reform plan and regulatory relief will lead to a sharp increase in GDP.
• Moody's confirmed Germany's Aaa rating (stable). DBRS confirmed the Irish rating at A (high, stable trend) and the Belgian rating at AA (high, stable trend). S&P affirmed Hungary's BBB- rating (stable) after a Sept.16 upgrade.
• Fitch confirmed Greece's rating at CCC. The government's compliance with the ESM programme conditions is one reason why Fitch believes Greece's European creditors would be prepared to proceed and disburse funds without IMF involvement. Another reason is the desire to avoid a Greek political crisis during an already congested European election year
• Two polls gave Macron 25% support of the French electorate in the first round of the presidential election, 2%-points behind Le Pen and 5%-points more than Fillon. Both surveys show Le Pen losing to either man in the second round.
• Sterling fell against all its major peers this morning after a report said UK Prime Minister May's team was preparing for Scotland to potentially call for an independence referendum in March.
• Today, US durables and EMU confidence data are the main eco releases, together with an Italian BTP auction. Further out this week, Trump's speech on Tuesday night and Yellen's speech on Friday are the focal points for trading

Currencies: Dollar Mixed Ahead Of Trump. USD/JPY Nearing Key Support

Dollar soft ahead of Trump testimony

On Friday, European markets shifted to risk-off modus. Soft comments of US Treasury Secretary Mnuchin on Thursday caused investor caution ahead of Trumps declaration on Tuesday night. European equities and core bond yields declined. The dollar traded also with a slightly negative bias, but the losses were modest. Equities rebounded in the US, but dollar regained hardly any ground. Especially USD/JPY didn't profited, probably as US bond yields held near the ST lows. USD/JPY ended the day at 112.13 (from 112.61). EUR/USD finished at 1.0563 (from 1.0582).

Overnight, Asian equities don't join the rebound in the US on Friday, but the losses are contained. Investors stay in wait-and-see modus ahead of key speech of US president Donald Trump and Fed's chairwoman Yellen later this week. The yen is holding near its short-term highs. USD/JPY is changing hands in the low 112 area, with the 111.60 range bottom within reach. EUR/JPY hovers just north of the correction low (118.25 area). EUR/USD shows no clear trend and is changing hands in the 1.0565 area.

Today, the EMU economic confidence (EC) is expected to rise for a sixth straight month (108.1 from 107.9). January US durable orders might rebound strongly, but it should be largely due to very strong (but volatile) aircraft orders. Core orders excluding transportation are expected up 0.5% M/M. They improved steadily in H2 of 2016, but can they maintain that pace? The impact on USD trading should be of intraday relevance, at best. Early last week, French election worries weighed on the euro, but these eased mid week. Even so, they were the clear driver for USD trading as other markets showed a diffuse, incoherent picture. Core bond yields continue to decline, despite strong eco data. The global equity rally slowed, but US equities are holding at record highs. For EUR/USD, euro softness prevails even as uncertainty on Europe eased last week. The focus of global investors now turns to the speech of US president Trump (Tuesday) and of Fed's Yellen ( late on Friday). We start the week with a neutral bias on EUR/USD. We expect USD/JPY to hold north of the 111.60 range bottom ahead of Trump's speech. However, the US president has to deliver on fiscal stimulus to support the dollar.

Global context. The dollar corrected lower since the start of January as the Trump reflation trade slowed down. Two weeks ago, the dollar bottomed out, supported by Trump's tax promise. However, underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and favour a sell EUR/USD on upticks approach. The downside test of USD/JPY was rejected. USD/JPY 111.60/111.16 (Range bottom/38% retracement of the 99.02/118.66 rally) remains a key support. The comments of Yellen before Congress (and of other Fed members) were USD supportive, but had no lasting impact on yields. We keep a USD positive bias longer term, but remain more cautious on the upside potential of USD/JPY compared to USD/EUR.

EUR/USD looking for clear guidance as markets await Trump and Yellen.

EUR/GBP

EUR/GBP and cable don't find a clear trend

Friday's risk-off correction was slightly negative for sterling. However, both EUR/GBP and cable held in well-known territory. UK loans for home purchases unexpectedly recovered further (44657 vs 42600 expected), but were ignored as was the case for the Brexit-story. In the afternoon, EUR/USD slightly outperformed cable, providing a cautious support for EUR/GBP. The pair finished at 0.8477 (from 0.8427). Cable finished the session at 1.2462 (from 1.2556).

During the weekend, The Times reported that the UK was preparing for a new Scottish independence vote which might coincide with the triggering of Article 50. Sterling trades slightly softer in Asia this morning. There are no important eco data in the UK today. The House of Lords starts a detailed review of the Article 50 bill. Markets will keep an eye on any headwinds for the PM May's Brexit strategy. For now, we assume that the impact on sterling should be limited. Earlier last week, the (temporary) acceleration of the euro sell-off pushed EUR/GBP to the 0.84 area. However, a sustained break lower didn't occur. As is the case for EUR/USD (and for several other markets), there is currently no clear driver for sterling trading. Longer term, we have a sterling negative view, as the Brexit will negatively impact the UK economy. However, this is no issue at this stage. A sustained break below 0.8450 opens the way for a return to the 0.8304 correction low. We maintain a neutral bias on sterling short-term.

EUR/GBP: attack of the 0.8450 support continue. NO sustained break yet.

Download entire Sunrise Market Commentary

Australia Q4 corporate profits rise as wages fall

Asia Mid-Session Market Update: Australia Q4 corporate profits rise as wages fall; GBP slides on speculation of another Scotland referendum

Friday US markets on close: Dow +0.1%, S&P500 +0.2%, Nasdaq +0.2%

Best Sector in S&P500: Utilities

Worst Sector in S&P500: Energy

Biggest gainers: FL +9.4%; INTU +6.1%; JWN +5.7%

Biggest losers: SWN -12.0%; HPE -6.9%; RRC -4.5%

At the close: VIX 11.5 (-0.2pts); Treasuries: 2-yr 1.16% (+2bps), 10-yr 2.32% (-7bps), 30-yr 2.96% (-7bps)

Weekend US/EU Corporate Headlines

BRK.A: Reports Q4 Operating EPS (Class A) $2,665 v $2,843 y/y

KATE: Michael Kors and Coach said to be among the suitors to reach second round of bidding for Kate Spade - press

Politics

(UK) UK govt said to be preparing for the new independence vote by Scotland - UK press

(US) Treasury Sec Mnuchin: Pres Trump's first budget will not include any cuts to social welfare programs such as Social Security and Medicare - press

(US) Former Labor Secretary under President Obama, Tom Perez, elected as the new chairman of Democratic Party - press

(US) President Trump nominee for Navy Sec, Philip Bilden, said to withdraw his own nomination - financial press

Key economic data:

(AU) AUSTRALIA Q4 COMPANY OPERATING PROFIT Q/Q: 20.1% (multi-year high) V 8.9%E; INVENTORIES Q/Q: 0.3% V 0.5%E

(NZ) New Zealand Jan Net Migration: 6.5K (record high) v 6.0K prior

Asia Session Notable Observations, Speakers and Press

Asia equities down slightly again as divergence from modest increases in US indices continues; Nikkei225 the biggest decliner on stronger JPY.

USD was under added pressure on Friday while yields on the longer-end of the curve come in more notably; GBP also falls by as much as 80pips on UK press report that Scotland is preparing to call for another referendum when PM May triggers article 50 next month. AUD briefly rises after Q4 corporate profits data.

Australia's corporate profits hit multi-year high as inventories growth comes in below ests; Expectations for higher GDP tempered by decline in the Wages component.

Ahead of US President Trump's address in front of Congress on Tuesday, Treasury Sec Mnuchin says the cabinet will not call for social spending program cuts but will seek sharp increase in defense funding.

China

(CN) China Securities Regulatory Commission (CSRC) chairman Liu Shiyu: Since capital market recovery from 2015 slump has been stronger than expected, China is ready for larger supply of IPOs - press

(CN) China National People's Congress (NPC) leaves corporate tax rate unchanged at 25% - SCMP

(CN) Chinese press citing researchers from State Information Center (SIO) forecast Q1 GDP at 6.6%

(CN) China said to ramp up its naval defense budget due to uncertainty about Trump's plans for South China Sea - press

Japan

(JP) Nearly 60% of poll respondents in Japan had a favorable view of PM Abe's meeting with US Pres Trump - Nikkei

Asian Equity Indices/Futures (00:00ET)

Nikkei -0.7%, Hang Seng +0.1%, Shanghai Composite -0.3%, ASX200 -0.3%, Kospi -0.3%

Equity Futures: S&P500 +0.2%; Nasdaq +0.1%, Dax +0.1%, FTSE100 +0.2%

FX ranges/Commodities/Fixed Income (00:00ET)

EUR 1.0550-1.0575; JPY 111.90-112.30; AUD 0.7660-0.7710; NZD 0.7185-0.7210; GBP 1.2390-1.2470

Apr Gold -0.1% at 1,257/oz; Apr Crude Oil +0.6% at $54.31/brl; May Copper -0.3% at $2.69/lb

(IR) Iran Navy Rear Admiral Habibollah Sayyari announces annual exercises to be held in the Strait of Hormuz - press

(CN) PBOC SETS YUAN MID POINT AT 6.8814 V 6.8655 PRIOR

(CN) PBOC to inject combined CNY30B v CNY30B prior in 7-day, 14-day and 28-day reverse repos

(KR) South Korea sells 20-yr bonds; avg yield 2.215% v 2.195% prior

Asia equities / Notables / movers

Australia

QBE Insurance QBE.au +2.9% (FY16 result)

Lend Lease LLC.AU +3.9% (FY16 result)

Austal ASB.AU -2.6% (H1 result)

MacMahon MAH.AU -3.3% (H1 result)

Japara JHC.AU -6.2% (H1 result)

Hong Kong

Fortunet 1039.HK -3.4% (profit warning)

Boer Power 1685.HK -4.6% (profit warning)

BYD Electric 1211.HK +3.4% (FY16 result)

Futures Land Development 1030.HK -7.1% (FY16 result)

On the 4h chart of NZDUSD we can see a nice eight wave cycle in play, with price specifically trading in the second phase of this cycle. If we are on the right track then current upward activity is part of the final leg C, that is trading in final stages. That said we believe upside may be limited in the near-term around the 50.0 or 61.8 Fibonacci ratio, as this three wave A-B-C move is regarded as a temporary correction. As such bearish movement may follow in the next few trading days.

NZDUSD, 4H