Rates: More divergence between US Note future and Bund
Last week’s technical break in the Bund/German 10-yr yield suggests further outperformance vs the US Note future, also taking into account Wednesday’s FOMC meeting. We expect a hawkish shift in the new dot plot, reflecting a strong assessment of the US economy by Fed governors.
Currencies: EUR/USD drifts south ahead of FOMC decision
FX markets traded on some potential divergence between the US and Europe last week. Soft ECB comments and low inflation might delay ECB policy normalization. At the same time, investors don’t want the be positioned short dollar ahead of the FOMC decision. EUR/USD 1.2155 support might again come on the radar.
The Sunrise Headlines
- US stock markets closed Friday’s trading session flat (Nasdaq) to 0.3% higher (Dow). Asian risk sentiment is mixed overnight with Japan and Korea underperforming after rumours that Apple is developing its and producing its own device displays for the first time.
- Russian President Putin won re-election by a wide margin (76.1%) strengthening his hand amid an escalating confrontation with the West. He will start a new six-year term after already 18 years in power.
- Three ECB policymakers (Villeroy de Galhau, Knot and Weidmann) struck an optimistic tone on the EMU inflation outlook despite stubbornly slow price growth so far this year.
- Iron ore is losing altitude fast. Futures in Singapore are heading for the lowest close in more than three months as investors fret about record holdings at China’s ports and concern that demand may disappoint.
- China named Yi Gang to run its central bank, elevating a long-serving deputy governor with deep international links to the forefront of efforts to clean up the nation’s financial sector and modernize monetary policy.
- The US Congress, facing yet another government shutdown deadline at midnight on Friday, will try this week to approve a massive spending bill that would end lawmakers’ nettlesome budget infighting, at least through Sept. 30.
- Today’s eco calendar contains only second tier EMU eco data. Belgium holds an OLO auction. G20 Finance Ministers meet in Buenos Aires
Currencies: EUR/USD Locked In Indecisive Trading Pattern
EUR/USD drifts lower ahead of FOMC
EUR/USD extended its gradual decline on Friday. EMU February inflation was revised from 1.2% to 1.1%, confirming recent analysis of ECB’s Draghi and Praet that there is still work to do on inflation. At the same time, investors remained a bit cautious on USD shorts going into this week’s FOMC meeting. US data including production and Michigan consumer confidence were good. The dollar maintained the benefit of the doubt. EUR/USD closed the session modestly lower at 1.2290. USD/JPY hovered up and down to close the session at 106.01.
Sentiment on Asian markets is fragile to slightly negative this morning. China outperforms. Investors maintain a cautious approach ahead of upcoming event risk including trade frictions between the US and its trading patterns and the FOMC policy decision. The trade-weighted dollar is holding near last week’s ST recovery top (currently 90.30 area). EUR/USD is drifting further south (1.2265 area). Comments from some less dovish ECB members this weekend (Knot/Weidmann) didn’t change the euro dynamics. The yen slightly outperforms the dollar. USD/JPY trades in the 105.74. Overall market uncertainty rather than Japanese politics are probably to blame.
Today’s EMU and US eco calendars are thin. Last week, soft ECB talk was reinforced by poor EMU inflation data. Even with those data, the debate on further ECB policy normalization will have to start further down the road. However, it is too early for the ECB to catch up with the Fed anytime soon. Interest rate differentials between the dollar and the euro widened further. For now, this presumed policy divergence is weighing slightly on EUR/USD. The pair tries to break intermediate support at 1.2273. EUR/USD 1.2155 might again come on the radar. We keep a close eye on USD/JPY & EUR/JPY. EUR/JPY breaking below 129.35 support could weigh further on EUR/USD, too.
UK news flow was mixed on Friday, but sterling remained well bid. EUR/GBP declined further to the low 0.88 area, partially due to euro softness. This week’s UK data might be mixed. Markets will keep a close eye at the EU summit looking for any progress on Brexit. The combination of a soft euro and hope on some Brexit progress might pull EUR/GBP a bit lower in the established 0.8950/0.8690.consolidation range
EUR/USD dollar outperforms euro ahead of FOMC decision