- Rates: US 10-yr yield heads to 2% support
Core bonds rallied on Friday with US Treasuries hugely outperforming German Bunds. The market implied probability of two Fed rate cuts this year exceeds 75%, with investors anticipating the Fed to step in to cushion the US economy from the fall-out from an escalating trade war. Mexico and India are the next victims on the US’ radar. - Currencies: EUR/USD gains modestly as dollar is losing massive interest rate support
Last week the dollar drifted lower as it suffered a massive loss of interest rate support. Still, the decline developed orderly. Today, the early month key eco data and further developments in the global trade war will guide USD trading. EUR/USD rebounded off the 1.1110 range bottom, but for now the technical picture hasn’t changed yet.
The Sunrise Headlines
- US stocks extended losses on Friday and delivered the worst May return in 7 years. The Nasdaq (-1.51%) underperformed. Asian equities are mostly coloured in red. Japan underperforms as the yen jumps
- US President Trump unexpectedly announced plans to impose a 5% tariff on all Mexican imports starting June 10. He did so to force Mexico stepping up efforts to stop illegal migration to the US.
- Trump also slapped India with tariffs after ending the country’s status as a developing nation. That status allowed India to export a wide range of goods to the US on a duty-free basis.
- China will create a “non-reliable entity list” of foreign companies that damage the “legitimate rights and interest” of its enterprises. The move comes with China’s retaliation to increased US levies kicking in last Saturday.
- Oil prices declined more than 12% in merely one week as a dramatic escalation of trade tensions fuels fears for a significant economic slowdown. Brent crude slipped from its April highs of $74/b to $61 currently.
- Germany’s ruling coalition is shaken to its foundations after the head of the SPD Andrea Nahles resigned this weekend in the wake of poor election results (EU, Bremen). Questions rise whether the SPD will exit the government or not.
- Today’s economic calendar contains the US manufacturing ISM. US President Trump meets with UK PM May in London. Fed’s Barkin and Bullard are scheduled to speak.
Currencies: EUR/USD Gains Modestly As Dollar Is Losing Massive Interest Rate Support
USD losing interest rate support
A flaring up in global trade tensions finally turned out in the disadvantage of the dollar end of last week. The US threat to impose tariffs on imports from Mexico sparked fears that the escalation in the trade war might weigh further on growth, inside and outside the US. Sentiment turned further risk off, but the dollar suffered as markets anticipated aggressive Fed rate cuts. EMU and US eco data were rather soft, but of second tier importance for FX trading. USD/JPY tumbled to close at 108.29. EUR/USD hovered in the 1.11 big figure but closed at 1.1169 (from 1.1136).
This morning, most Asian equites are declining further (Korea and India are the exception) but the decline remains orderly. The (trade-weighted) dollar (97.65 area) stabilizes after Friday’s sell-off. USD/CNY is holding stable in the 6.90 area. The yen outperforms slightly (USD/JPY 108.20 area). The euro also lightly outperforms the dollar (EUR/USD 1.1175).
Today’s final EMU manufacturing PMI are expected to confirm a sluggish performance in the sector. The US Manufacturing ISM is expected to stabilize around 53 after a sharp decline last month. A poor figure might reinforce market expectations on further Fed rate cuts. Markets will also keep a close eye on global trade topics, in particular on comments from president Trump as he visits to the UK. He might put further pressure on the US-EU (political and trade) relations.
Over the previous two weeks, EUR/USD tested the 1.1110 support area but no sustained break occurred. A broader USD up-move was capped as investors anticipate more Fed rate cuts as trade tensions might hurt both global and US growth. That said, Friday’s rebound in EUR/USD was modest given the sharp narrowing in the US-EU (GE) spread. So, the jury is still out whether current developments will be a game-changer for the euro. At least the EUR/USD downside looks better protected. Some further gains in the 1.1110/1.1324 range are possible with intermate resistance at 1.1265.
Sterling remained in the defensive on Friday as a global risk-off and uncertainty on Brexit weighed. EUR/GBP temporarily jumped to the 0.8870/75 area, but finally the pair returned to well-known territory in the 0.8840 area. Today, the UK manufacturing PMI is expected to ease to 52.2 and markets will look out for headlines from the Trump visit. The US president advocating a hard Brexit probably won’t help sterling
EUR/USD gains modestly as US-EMU (GE) interest rate spread narrows sharply
