Rates: Sideways trading ahead
Last week’s consolidation on core bond markets is expected to continue at the start of the trading week given the thin eco calendar. Central bankers are expected to confirm recent guidance on monetary policy. Italian political developments are expected to weigh on BTP’s, but shouldn’t influence global sentiment.
Currencies: USD rally slows after modest US CPI
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At the end of last week, the dollar lost slightly ground. A modest US CPI report slowed the recent rise in US yields and in the dollar. The subsequent risk-on context was also a slightly USD negative. The eco calendar is thin today. Despite a rather soft US CPI, we don’t see a trigger for a protracted rebound in EUR/USD at this moment.
The Sunrise Headlines
- US stock markets ended mixed on Friday with Dow Jones putting a slightly better performance (+0.4%). Most Asian equity indices trade positive overnight with China outperforming (+1%).
- Italy’s leading populist parties are within striking distance of forming a government in the EMU’s third-largest economy after reaching tentative agreement on a common platform — but not on a choice of prime minister. (FT)
- The US threatened to impose sanctions on European companies that do business with Iran, as the remaining participants in the Iran nuclear accord stiffened their resolve to keep that agreement operational. (Reuters)
- The UK must spell out plans for post-Brexit co-operation on foreign and security policy before next month’s European Council if it is to live up to its goal of continuing to work closely with its EU allies, lawmakers said (BB)
- Andrej Babis’s Ano party and the Czech Social Democrats have agreed a draft coalition agreement, edging the Czech Republic closer to a government nearly seven months after an inconclusive parliamentary election. (FT)
- St. Louis Fed Bullard (dove) spelled out the case against any further interest rate increases, saying rates may already have reached a “neutral” level that is no longer stimulating the economy. (Reuters)
- Today’s eco calendar only contains second tier eco data, but a lot of central bank governors are scheduled to speak.
Currencies: USD Rally Slows After Modest US CPI
USD running into resistance after modest US CPI .
Thursday’s softer than expected US CPI caused some kind of change in the mind-set on global markets. The report was close to consensus, but convinced markets that the Fed won’t change its gradual path to policy normalisation. This slowed the rise in US yields and in the dollar and supported equities. EUR/USD rebounded to close the week at 1.1946. USD/JPY tested the 110 area on Thursday, but closed at 109.39.
Overnight, last week’s trends continue in Asia. Asian equities mostly show modest gains and US equity futures suggest that the US equity rally might continue. USD/JPY hovers in the lower half of the 109 big figure. EUR/USD revisited last week’s correction top in the 1.1968 area, but no follow-through gain occurred. Euro investors probably keep an eye at the political developments in Italy as the 5SM and League parties are making good progress to reach an agreement to form a government.
Today, there are few eco data in Europe or in the US, but several ECB and Fed members will speak. Investors will also keep an eye at the geopolitical developments. Tension in Korea are apparently easing. US president Trump recently also held a more constructive tone on the trade talks with China. The picture in the Middle East looks more complicated. In a day-to-day perspective, the risk-on context combined with relative calm on the (US) interest rate markets looks a tentatively negative for the dollar. However, in somewhat longer term perspective, we don’t see profound change. Short-term developments (both economically and from a monetary point of view) still look modestly USD supportive. EUR/USD returning north of 1.20 would cause some doubts on the USD, but even in that scenario we don’t see a trigger for a powerfull EUR/USD comeback in the very near future.
On Thursday, sterling lost substantial ground as the BoE left its policy rate unchanged at 0.5%. The BoE admitted that CPI inflation has declined faster than expected, but still sees some excess demand over time. This keeps the door open for a very gradual tightening over the policy horizon. EUR/GBP rebounded north of 0.88. The markt now sees a chance of about 65% of a rate hike In november. EUR/GBP 0.8850 is a first resistance. Brexit remains a wild card, but unless the process swirls completely out of control, we expect EUR/GBP to hold the 0.89/0.86 trading range. Decent UK eco data might make investors reconsidering the chances for an August rate hike
EUR/USD: downtrend taking a breather