Markets:
Today’s trading session lacked strong drivers, but core bonds nevertheless held their upward bias. Geopolitical risk was omnipresent this morning with the US upping sanctions against Iran, provoking an immediate diplomatic response. Sentiment around Friday’s supposed Trump Xi Jinping meeting dwindled as well. The German 10-yr yield is testing the -0.33% all time low with the US 10-yr yield extending the battle with the 2% area. US yields decline by 0.5 bps (2-yr) to 1.9 bps (10-yr) at the time of writing. Changes on the German curve range between +0.6 bps and -2 bps. The main event lies still ahead of us with a speech by Fed Chair Powell after European trading. Markets turned even more softer since the Fed’s June policy meeting. A July rate cut is 100% discounted, with market 60/40 split on whether it will be a 25 bps or 50 bps one. Will Powell align with one of these market views or try to tone down expectations?
The uptrend in EUR/USD took a breather today. The currency pair hovered near recent highs during a fragile Asian session but felt some slight selling pressure as European investors entered the market. EUR/USD dipped to an intraday low at around 1.138 but is now again filling bids close but below the 1.14 handle. USD/JPY barely manages to hold ground above 107 after slipping this morning amid Asian risk off. Today’s low volatility session suggests markets are looking for new clues in FX trading (data, monetary policy and/or geopolitical wise). End of this week’s G20 summit might prove a pivotal point in currency markets but so could tonight’s speech by Fed chair Powell. Will he confirm or dismiss market’s view of a July rate cut? We suspect investors are keeping a low profile and await how these events unfold.
Sterling trading remains mostly technical in nature as the Tory campaign to become the UK’s next prime minister heats up. Boris Johnson, still the front-runner, said during an interview he wants to renegotiate May’s brexitdeal completely, rather than just tweaking it and reiterated he won’t delay Brexit again. Johnson’s comments didn’t trigger much market volatility however. Investors realize that at least some of his talk (and Jeremy Hunt’s for that matter) is campaign rhetoric. Sterling initially strengthened to EUR/GBP 0.892 but retreated during early US trading hours to levels virtually unchanged vs. opening (0.895). Cable showed a very similar trend, currently changing hands at around 1.272 (vs. 1.274 at opening).
News Headlines:
The Hungarian central Bank (MNB) left rates stable at 0.90% (-0.05% for the overnight deposit rate). Although inflation remains in the upper band of the MNB’s 3% +-1% target range (3.9% in May), it said price data in the second half of this year will be “decisive” for monetary policy. The central bank raised both inflation and growth estimates for the next 3 years.
Mexico said it has sent almost 15 000 forces to its northern border to curb migration to the US. Mexico and the US agreed on June 7 to significantly reduce US migration within a 45 day period. President Trump said he will impose a 5% import tariff on all Mexican goods if the measures to limit the flow are considered insufficient.
The US Conference Board consumer confidence fell from (a downwardly revised) 131.3 to 121.5 in May as consumers were both less optimistic about the present situation and the future outlook. Markets expected the decline to be less dramatic (131.0).
