- Rates: St.-Louis Fed Bullard first one to call for rate cut
The US yield curve bull steepened again yesterday after Fed Bullard openly called for a rate cut “soon”. He’s the first to do so. The US 10-yr yield’s first attempt to break below the 2.06%-2.01% area failed. Time for some short term profit taking on heavily overbought US Note future and Bund contracts? - Currencies: Dollar decline accelerates. EUR/USD nears first resistance at 1.1265
The dollar decline from the end of last week accelerated yesterday. Market speculation on substantial Fed rate cuts sharply reduced interest rate support for the US currency. EUR/USD is nearing first resistance at 1.1265. Today, a soft EMU CPI might slow further euro gains. That said, current sharp FX moves are mainly dollar driven and this trend might continue.
The Sunrise Headlines
- Yesterday’s decline in US stocks was mainly tech-driven after reports of antitrust scrutiny in the sector. The Nasdaq underperformed (-1.61%). Asian equities are trading mixed. China underperforms as growth concerns linger.
- Trump’s latest tariff threat to Mexico has caused frustration among Congressional Republicans. They consider blocking the move by overriding the national emergency determination on which Trump’s move relies.
- The Australian central bank has cut rates from 1.50% to 1.25%. It will continue to monitor labor market developments closely but gave no clear hint about policy going forward. The Aussie dollar (AUD/USD 0.698) was little changed.
- Fed’s Bullard (voter) thinks a rate cut might be needed soon to prop up inflation (expectations) and to cushion the fallout of the escalation trade war. Bullard said the market’s current positioning signals that policy’s too restrictive.
- Italian PM Conte threatened to resign if Lega and 5SM do not start cooperating. He also warned them that EU budget rules “remain in force until we manage to change them”, alluding to a potential rerun of last year’s clash with Brussels.
- Germany’s SPD and coalition partner said it won’t leave the government after its head resigned on Sunday. The SPD will be jointly led by three people before electing a new leader in October.
- Today’s economic calendar eyes rather thin with only EMU inflation (May) scheduled for release. The Chicago Fed Conference is worth paying attention to with Fed’s Powell (amongst others) discussing the monetary policy strategy.
Currencies: Dollar Decline Accelerates. EUR/USD Nears First Resistance At 1.1265
USD correction accelerates
USD losses accelerated yesterday. The steep decline in US yields finally caused investors to reduce USD long exposure against other majors like the yen or the euro, undermining the US currency’s safe haven status even as sentiment remained risk-off. The US May manufacturing ISM declined slightly but with limited impact on the dollar. The details were not too bad. Later, a further decline of tech stocks and US yields setting new ‘cycle lows’ triggered a new USD down-leg. Fed’s Bullard indicating a rate cut might be warranted soon reinforced the dollar negative sentiment. EUR/USD closed at 1.1241 (from 1.1169). USD/JPY filled bids below the 108 barrier but closed at 108.07. This morning, most Asian equites indices decline further, but the down move in US yields is slowing. USD/JPY is struggling not to fall below the 108 handle. EUR/USD stabilizes in the mid 1.1250 area. The yuan hardly profits from the overall USD decline (USD/CNY 6.9075). The RBA as expected cut its policy rate by 0.25% to 1.25%. The RBA will closely monitor developments in the labour market and in inflation, but gave no clear guidance on further easing. AUD/USD hovers in the 0.6975 area.
Today, the calendar contains US order data and the EMU May CPI and unemployment rate. After a ‘technical’ up-tick in May, EMU CPI is expected to decline to 1.3% from 1.7%. We see downside risks. The EUR/USD rebound since end last week was mainly USD weakness due to the sharp decline in US yields. Still, a negative EMU inflation surprise might slow further euro gains, at least short-term.
EUR/USD tested the 1.1110 support area several times, but no sustained break occurred. A broad USD up-move was capped as markets anticipate substantial Fed rate cuts as trade tensions might hurt US growth. The USD decline accelerated end last week. EUR/USD is nearing first resistance in the 1.1265 area. A break would improve the ST technical picture with 1.1324 the next target.
No change in the story on sterling trading yesterday. A poor UK manufacturing PMI and persistent uncertainty on Brexit/UK politics kept sterling in the defensive. EUR/USD strength also helped EUR/GBP to extend gains beyond the 0.8840 previous resistance. Today, the UK construction PMI is expected stable just above 50. Markets will also keep an eye at Brexit related comments on the side-lines of president Trump’s visit to the UK. We see no reason to row against the EUR/GBP uptrend
EUR/USD rebounds on global USD weakness. First resistance at 1.1265 is coming with reach
