- Rates: ECB sends more dovish signals
Core bonds retain positive momentum after yesterday’s soft message from ECB President Draghi. He stressed readiness to adjust parameters of the central bank’s policy if needed to fight the economic downturn. Today’s EMU eco calendar is empty while the US one only contains second tier numbers. Markets will start looking out for Q1 earnings season. - FX: Euro doesn’t decline despite soft ECB. More by-default USD weakness to come?
EUR/USD showed remarkable swings yesterday. The euro declined during the ECB press conference, but at the end of the day, USD-weakness still prevailed. The US-German interest rate differential didn’t widen despite the soft ECB. Has the US more leverage to keep its currency weaker than the ECB? Sterling hardly reacted to the Brexit delay
The Sunrise Headlines
- US equity markets edged higher yesterday with technology shares outperforming (Nasdaq +0.69%). Most Asian equities are losing ground this morning with Chinese indices underperforming.
- The EU has offered the UK an extension of the Brexit deadline to October 31, but with the possibility for the UK to leave sooner if the UK Parliament ratifies the divorce deal. UK PM May will now continue cross-party talks with Labour.
- US Treasury Secretary Steven Mnuchin said that the US and China nearly completed the currency agreement and agreed on an enforcement mechanism for a potential trade deal, both key elements in the final negotiations.
- The Fed Meeting Minutes of March show that FOMC members are pleading for the wait-and-see approach as risks of a global slowdown are increasing and inflation readings are weaker-than-expected.
- Chuck Grassley, US Senate Fin. Cmte chair, said that the US government report that could lead to tariffs on cars, will likely not be released as the report contains many shortcomings, possibly delaying Trump’s decision to beyond May.
- Australian PM Scott Morrison called the general election for May 18. Latest polls show Morrison’s Liberal-National coalition, who’s seeking a third straight term, is trailing opposition party Labour by four points.
- Today’s eco calendar contains producer inflation data (March) and this week’s jobless claims in the US. Sweden prints its consumer inflation data (March). Fed giants Clarida, Williams and Quarles speak today. The US taps the bond market.
Currencies: Euro Doesn’t Decline Despite Soft ECB. More By-Default USD Weakness To Come?
Euro doesn’t decline despite soft ECB
EUR/USD made some sharp swings yesterday. The pair traded near recent top close to 1.1280 at the start of the ECB press conference. Draghi admitted that the EMU growth slowdown is more profound than expected. In this context, EMU rates might stay (very) low for longer. The euro sank during the press conference. However, US yields also declined even as US inflation was close to expectations. The US-German rate differential didn’t widen despite a soft ECB. EUR/USD soon reversed its post-ECB loss. US Treasury Secretary Mnuchin indicating that the US and China agreed on the FX part of a trade deal maybe was a USD negative, too. The Minutes of the March Fed meeting confirmed a balanced wait-and-see approach and didn’t cause a further USD decline. EUR/USD closed at 1.1274 (from 1.1263). USD/JPY finished at 111.01. Asian equities mostly show moderate losses this morning with China underperforming. The dollar stays in the defensive (EUR/USD 1.1280 area; USD/JPY low 111.00 area). Today, the eco data in the US and Europe are second tier. US jobless claims are expected to remain low. Y/Y US PPI inflation is expected little changed from last month. Several Fed governors are scheduled to give their view on the economy.
Yesterday price action in EUR/USD was quite remarkable. The euro and the dollar both felt downside pressure. Despite a soft ECB, the dollar finally returned near this week’s lows. The jury is still out, but the US and China reaching an agreement on FX might be a harbinger of the US persuing a more active ‘nottoo- strong’ dollar policy. Maybe the US has more leverage/means to keep its currency weak compared to the likes of the ECB and the BOJ. 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. Yesterday and Tuesday, it looked that the EUR/USD rebound could lose momentum. However, looking at yesterday’s price action, some further by default USDlosses/ euro gains are still possible.
The EU gave the UK more time resolve the pollical statement on Brexit. A flexible time table allows the UK to stay in the EU to Oct 31. The reaction of sterling was telling. EUR/GBP hardly reacted. The pair continued to hover near the 0.86 pivot. With the UK heading for a new period of domestic political uncertainty, we see no reason to turn more positive on sterling. The BoE has also no reason to raise rates anytime soon. We assume the EUR/GBP 0.85 support area to be solid.
EUR/USD holding strong despite soft ECB
