- Rates: Core bonds to hold positive momentum
The ECB is expected to keep policy unchanged today following the drastic decision taken last month amid a gloomy eco outlook. Draghi will be grilled on conditions for new TLTRO’s and on the possibility of tiering the deposit rate to stem side-effects from negative interest rates. Market conditions are expected to remain in favour of stronger core bonds. - Currencies: Euro remains resilient despite risk-off
EUR/USD initially gained further ground yesterday even as the US considered tariffs on EU imports and as IMF cut the global growth forecast. In the end the balance between the USD and the euro was restored. Today, the US CPI, the ECB policy meeting and the EU summit on Brexit will spice FX trading. For now, we don’t see a big case for sustained further euro gains
The Sunrise Headlines
- US equity markets lost ground yesterday with losses over half a percentage point with the DJI underperforming (-0.72%). Asian equities are trading mixed this morning with Japanese indices underperforming.
- The EU decides today if Brexit will be postponed again and if it’s the case, for how long. Most EU-members signalled the UK could remain in the EU for almost another year (at strict conditions), despite May seeking a delay until June 30.
- The EU and China agreed to work towards a deal in 2020 in which China opens its markets to foreign investors. China also signals willingness to discuss EU concerns on state support and IP rights, but nothing is concrete so far.
- Benjamin Netanyahu is close to winning the Israeli elections. With 95% of the vote counted, his right-wing bloc takes a narrow lead over the Blue and White party of Benny Gantz. It would be Netanyahu’s 5th term as PM in a row, a record.
- US job openings declined to 7087k in February, 538k jobs less than the month before, accounting for the largest drop since 2015, but possibly reflecting temporary factors. The quits rate held steady at 2.3%.
- Australia’s Westpac consumer confidence index rebounded to 100.7 in April, up from 98.8 a month before. The Australian dollar gained on the news, pushing AUD/USD back north of 0.713.
- The ECB meeting and Brexit Summit are key today. The eco calendar contains March consumer inflation data, a 10-yr Note auction and the Minutes of the previous Fed meeting. Norway prints CPI data (Mar) as well.
Currencies: Euro Remains Resilient Despite Risk-Off
Euro resilient despite global risk-off
The dollar initially declined further yesterday and the euro remained well bid. The move was a bit remarkable. Sentiment turned risk-off as the US indicated to prepare tariffs on EU imports to retaliate for EU aircraft subsidies. The IMF downgrading its global growth outlook was a potential euro negative, too. Still EUR/USD touched a ST top in the 1.1284 area. Later, the balance between the euro and the dollar was restored. EUR/USD closed unchanged at 1.1263. USD/JPY tested the 111-level intraday. The yen closed with a modest gain at 111.14.
Asian equities mostly show moderate losses this morning as uncertainty on global growth weighs. US yields are declining, but for now the negative impact on the dollar is modest. EUR/USD is little changed in the 1.1250 area. USD/JPY is trading in the 111.10 area. The Aussie dollar gains slightly on a better than expected consumer confidence and on balanced comments from RBA’s Debelle (AUD/USD 71.40 area).
US CPI, the EU summit on Brexit and ECB policy meeting are scheduled today. At the ECB press conference, president Draghi will likely receive questions on the new TLTRO’s (details) and on a tiered system to mitigate the impact of the negative deposit rate. We expect limited impact on FX trading. US headline CPI is expected to rise from 1.5% to 1.8% (core stable at 2.1%). Looking at this week’s price action, the dollar is probably more sensitive to a negative rather than to a positive surprise. This evening, the EU will decide on a new Brexit delay. The process will probably result in avoiding a no-deal Brexit, but uncertainty on the future process remains as high as it was. In this respect, there is no reason for euro or sterling euphoria.
Last week, EUR/USD came close to the 1.1177/87 support, but a real test/break didn’t occur. For that to happen, unexpected negative EMU news or surprisingly strong US data are needed. Recent data evidence doesn’t support this scenario. We keep the view that a sustained EUR/USD break lower isn’t evident as we don’t expect the Fed to leave its wait-and-see bias anytime soon. For now, EUR/USD is locked in the 1.12 big figure. In a day-to-day perspective, we see no big case for sustained further euro gains.
EUR/GBP hovered up and down in the lower half of the 0.86 big figure yesterday. The EU will probably propose a long but flexible Brexit delay. Even if this scenario avoids the UK dropping out of the EU with no deal, political turmoil in the UK will probably persist. We maintain the view that this scenario is neutral for sterling at best. We expect the EUR/GBP 0.8500/0.8492 support to be tough to break short term.
EUR/USD rebounds off 1.12 on USD softness
