Sunrise Market Commentary

• Global core bonds rally as risk aversion reigns
  After an uneventful morning session on Friday, global core bonds rallied later on, especially German bonds, as the unrest in the peripheral markets supported a flight to safety. Over the weekend, Fitch downgraded Greece, S&P put the outlook for Italy to negative and the ruling Spanish Socialists party suffered a crushing defeat in the regional and local elections.
• Euro hammered as European debt crisis comes in the spotlights again
  On Friday, investors grew ever more concerned on several political issues that might complicate a new rescue deal for Greece. EUR/USD is testing the 1.4048 support this morning. A break below this level would deteriorate to short-term picture in this cross rate. EUR/GBP is developing a similar pattern.

The Sunrise Headlines

• US Equities ended the week lower on Friday, falling for the first time in four sessions. This morning, also Asian shares trade sharply lower as debt fears resurface in the euro area.
• Spain's governing Socialist party suffered a crushing defeat in regional and local elections yesterday. With nearly all of the ballots tallied, the opposition Popular Party had 37.55% of the municipal vote across the country, nearly 10% more than the socialists.
• Rating agency Standard & Poor's cut its rating outlook for Italy to negative from stable, citing weak growth prospects and increased risks it would fail to slash its debt mountain. Fitch Ratings downgraded Greece's credit rating to B+ and put the country on rating watch negative.
• Today, Greek Prime Minister Papandreou will discuss new measures with his cabinet to cut the budget deficit, in an effort to convince lenders Greece can deal with a debt crisis without a restructuring.
• The Bank of England should starts to raise interest rates from record low levels to tackle inflation or risk damaging its economy, its chief economist Spencer Dale said in an interview with the FT.
• Chinese factories expanded in May at their slowest pace in 10 months while price pressures eased, a PMI index showed, adding to evidence that the economy is moderating as a tighter policy starts to bite.
• German Chancellor Angela Merkel was set to suffer a fresh blow in regional elections with her CDU heavily shedding votes and her partner, the FDP struggling to get into parliament in the Bremen state vote.
• Today, the eco calendar contains only the euro zone PMI's.

Currencies: Euro Hammered As European Debt Crisis Comes In The Spotlights Again

EUR/USD

On Friday, EUR/USD traders experienced a nervous trading session, even as there were hardly any data with market moving potential. At the end of the day, the negative news flow on the EMU debt crisis had again become the focal point for trading and this made EUR/USD returning (more than) Thursday's gains.

European equities had still some catching up to do on the late session rebound in the US on Thursday evening and traded accordingly. So, at the start of the session, it looked that sentiment on risk would stay positive at the end of the week. EUR/USD reached a minor new high in the 1.4345 area. However, the positive momentum could not be maintained and both equities and EUR/USD turned south. The move probably developed in rather thin market conditions as there were no important data on the calendar. Nevertheless, the market talk soon returned to the institutional problems in Europe that have come the surface as European policy makers try to find a new solution for Greece. Amongst others, the harsh standpoint of the ECB that any restructuring of the Greek debt is inacceptable was a source of hefty debate. The ECB warning that it might stop accepting Greek government bonds as collateral in case of any restructuring has surprised a lot of observers. It looks as if the ECB is on collision course with a lot of other EMU policy makers which are involved in the process. An open rift between two major players in search for a solution of a difficult crisis is not a nice story. This rift caused negative fall-out on the euro, too. So, EUR/USD started a gradual decline that lasted into the US trading session. Uncertainty on the outcome of the Spanish local elections was another reason/excuse to scale back euro long exposure going into the weekend. It was not the first time that the euro was in the defensive ahead of the weekend. At the end of the European trading session, rating agency Fitch downgraded the credit rating of Greece to B+. This was of course also no help for the single currency. EUR/USD closed the session at 1.4161, compared to 1.4309. This is quite a significant loss for a day with no important news on the agenda.

During the weekend the bad news show continued as rating agency S&P revised the outlook on the Italian A+ credit rating from stable to negative. So, one might expect that the European debt crisis will stay in focus today. Regarding the data, the calendar in the US is again very thin. In Europe, we look out for the advance reading of the EMU PMI's. A stabilisation/moderate decline is expected. The impact of the release on markets should be limited. In the current market sentiment, the risk is for somewhat of an asymmetrical reaction: a weaker than expected figure has some more potential to cause a market reaction while a better than expected figure will probably be ignored. There are again a lot of public appearances from ECB members and meetings of other EU policy makers, including a meeting of Germany's Merkel with EU's Juncker. Markets will take a close look whether they will yield any new hints on how the EU will address the next stage in the sovereign debt crisis. Whatever the outcome of any of those meetings, European politics will remain in the spotlights today. Amongst others, the result of the Spanish regional elections and the protests in the country will get ample coverage in the media. Some might even mention the eruption of the Grimsvotn volcano on Iceland as a potential negative for Europe and its economy. So, one might expect investors to be very reluctant to take (European) risk at the start of this new trading week. This will weigh on the EUR/USD cross rate. In this respect, EUR/CHF is already setting new lows below the 1.24 mark this morning.

We had a LT bullish strategy for the EUR/USD cross rate based on the different policy approach between the ECB and the Fed. However, extreme euro long positioning made the cross rate vulnerable to a short-term correction. The recent correction started as the ECB didn't signal a rate hike in June as markets expected. Renewed uncertainty on Greece and the commodity correction reinforced the repositioning in EUR/USD, too. Last week, we reinstalled a cautious buy-on-dips approach as the pair showed some tentative signs of bottom out off from Monday's low at 1.4048, even as the rebound was far from spectacular. The pair reached a minor new high at 1.4345 on Friday, but from there, a sharp profit taking move kicked in and brought the pair again within striking distance of the 1.4048 correction low. At least in a short-term perspective, the political and institutional uncertainty is becoming more important as a factor for EUR/USD trading. A drop below 1.4048/00 area would be an indication that the bottoming out process failed and that a new down-leg might be in store. We think there is quite a high probability for this scenario to materialize. So, we start the new week with a negative bias for EUR/USD. Tight stop-loss protection on EUR/USD longs looks highly warranted. Short-term players can even look to join the move in case of a drop below 1.4048.

Support comes in at 1.4062/48 (Reaction low/Reaction low MT), at 1.4021 (28 Mars), at 1.400/99 (Psychol/5 wave hourly) and 1.3900/93 (50% retracement/Boll bottom).

Resistance stands at 1.4155 (Gap open), at 1.4203 (STMA), at 1.4242/53 (Daily envelope/ MTMA), at 1.4296/07 (Weekly STMA +weekly envelope/ Breakdown hourly), at 1.4341/45 (50 D MA/ Reaction high).

The pair is moving into oversold territory.

USDJPY

On Friday, the focus for currency trading was on the euro side of the story. The USD/JPY cross rate showed some intraday swings, but after all the pair developed a sideways trading pattern in a tight range roughly between 81.50 and 81.85. As was already the case of late, the yen didn't profit much from the deterioration in global sentiment on risk going into the weekend. USD/JPY closed the session at 81.70, not that much changed from the 891.61 close on Thursday.

This morning, negative sentiment on risk is pressuring most Asian equity indices; However, once again, the yen fails to profit from it against the dollar. USD/JPY is even trading higher this morning.

Over the previous month, USD/JPY developed an almost uninterrupted decline off from the early April correction high at 85.53. The move was a correction on the sharp decline of the yen early last month, but also mirrored underlying global dollar weakness. We looked to pick up the USD/JPY cross rate in 80/81 area. This target area has been reached. So, a tactical USD/JPY long position could be considered. The story on USD/JPY remains ambiguous, but the constructive sentiment on risk has given the pair downside protection of late. Last week, sentiment on risk turned less positive but USD/JPY was/is holding up reasonably well. We maintain a cautious positive bias for this cross rate. Stop-loss protection to defend return action below 80 remains warranted.

Support comes in at 81.67/46 (STMA/daily envelope), at 81.19/05 (Break-up hourly/MTMA), at 80.63 (reaction low +weekly envelope), at 80.34 (13 May low) and at 80.15 (Reaction low) and at 79.57 (Reaction low).

Resistance is seen at 82.04 (Weekly MTMA), at 82.17/23 (Daily envelope/Reaction high + breakdown hourly), at 82.55 (50% retracement), at 82.64/74 (Broken uptrend line/Reaction high) and at 83.82 (Breakdown weekly).

The pair is in overbought territory

EURGBP

On Friday, EUR/GBP more or less copied the prices swings in the headline EUR/USD cross rate. The pair reached an intraday high just below Thursday's correction high (0.8846). From there, the broader correction of the euro also pushed EUR/GBP lower. The pair showed an almost uninterrupted decline that lasted till the end of trading in the US. The move was in the first place euro driven. There were no eco data on the calendar in the UK. EUR/GBP closed the session at 0.8725, compared to 0.8814 on Thursday.

Today, calendar of eco data in the UK is again empty. So, global sentiment on the euro and technical considerations will set the tone for trading in this cross rate. Looking at the news headlines and the market performance this morning, the euro is still fighting and uphill battle. BoE's Dale in a press article pleads for a rate hike, but his point of view was already known.

In line with EUR/USD, we have a LT EUR/GBP bullish view. The ECB's firmness to rein in inflation contrasts with the BoE MPC's attitude of postponing a rate hike despite ongoing sky-high inflation readings. The EUR-GBP interest rate differential increased accordingly and pushed the pair beyond the 0.90 mark early May.

Early May, we indicated that we hoped for a (technical) correction in a market that was positioned overly long euro to give us a chance to (re)enter the market at lower levels e.g. in the 0.8715 to 0.8654 area (previous lows). Until the May 05 ECB press conference, these levels looked very far away, but the post-ECB sell-off made them again more realistic. We reached our target the last week. We reinstalled a cautious buy-on-dips approach. A cautious rebound started, but after Friday's sell-off, we are again close to the 0.8674/54 support area. A drop below this level would signal that the correction of the euro has also further to go for this cross rate (ST stop loss). Such a scenario is becoming ever more likely. In a LT perspective, we think that the downside risks in EUR/GBP are less compared to EUR/USD. Nevertheless, in a dayto- day perspective, the risks for a drop below the 0.8654 area are rising quickly.

Support comes in at 0.8679/74 (Reaction lows), at 86.54 (23 March low), at 0.8629 (Boll Bottom) and at 0.8604 (Weekly envelope).

Resistance is seen at 0.8717 (Reaction high), at 0.8759 (Breakdown hourly + STMA + MTMA), at 0.8782 (weekly + Daily envelope), at 0.8818 (LTMA) and at 0.8846 (Reaction high).

The pair is moving into oversold conditions.

News

EMU: consumer confidence unexpectedly improved

In May, European Commission's consumer confidence unexpectedly improved, according to the first estimate. The headline index rose from -11.6 to -9.7, the highest level since November last year, while the consensus was looking for a third consecutive decline. The improvement was probably due to strong economic activity in the core EMU countries. The austerity measures and continued turmoil in peripheral countries were probably limiting the improvement in those countries. The final data (published on Friday) will provide us with more details

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