- Rates: Fed Chair Powell to stick to insurance view
‘An ounce of prevention is worth a pound of cure.’ Fed chair Powell is expected to stick to this, discounted, view on the 1st day of his semi-annual testimony in front of US Congress. FOMC Minutes will probably hint on a (25 bps) July rate cut as well. This scenario is by and large discounted and shouldn’t trigger a new rally in US Treasuries. - Currencies: Will Powell testimony trigger a test of EUR/USD 1.1181?
The dollar remained well bid after Friday’s US payrolls as investors are counting down to Fed Powell’s testimony before Congress. The Fed president confirming a preventive rate cut this month but remaining cautious on the pace of further cuts might keep the dollar supported short-term. EUR/GBP is attacking the 0.90 barrier.
The Sunrise Headlines
- US stocks ended mixed with the DJI finishing marginally lower (-0.08%) and the Nasdaq higher (+0.54%) after the US relaxed the Huawei ban. Asian markets also trade without direction. South Korea outperforms, Japan is lagging.
- US vacancies unexpectedly declined in May, resuming the topping out after last November’s record high. The quits rate (2.3%) stabilized at the highest since 2005, suggesting confidence among workers to find a new job.
- British MP’s approved Grieve’s amendment that requires Parliament to hold fortnightly sessions – an attempt to fend off proroguing by the next PM to force a no-deal. But they did not back his second proposal that would block it outright.
- US economic advisor Kudlow said talks between USTR Lighthizer and Treasury Secretary Mnuchin and their Chinese counterparts were ‘constructive” and will continue. Counselor Conway said US officials might make a trip ‘shortly”.
- Greece’s new finance minister Staikouras shed light on the public finances. He warned for ‘bombs with lighted fuses”, referring to the country’s heavily indebted main energy supplier and cash flow problems at the Greek Post Office.
- The US will issue licenses to companies to sell their products to China’s Huawei. They were forbidden to do so after US/Sino trade talks collapsed in May. Trump said he would ease the ban after the G20 meeting with China’s Xi.
- Today’s economic calendar heats up as we watch for Powell to speak before Congress. The Fed releases its latest FOMC meeting minutes. The UK publishes GDP and industrial data. The US, Germany and Portugal tap the bond market
Currencies: Will Powell Testimony Trigger A Test Of EUR/USD 1.1181?
EUR/USD to test 1.1181 support ?
The dollar stayed well supported yesterday with USD/EUR and USD/JPY setting minor correction top levels. The US currency recently regained additional interest rate support as solid US eco data caused market to scale back bets for aggressive Fed easing in the near future. Eco data were second tier and had little impact on trading. Equity sentiment improved throughout the session. The simultaneous gradual rise in core yields was also tentatively USD supportive. EUR/USD closed the session at 1.1208 from 1.1214. USD/JPY finished at 108.85 (from 108.72).
This morning, Asian equity indices mostly show limited to moderate gains with Japan underperforming and Korea outperforming. The dollar struggles to extend recent gains. USD/JPY came close to the 109 level, but no break occurred yet. EUR/USD hovers in the low 1.12 area. The Aussie dollar (AUD/USD 0.6920 area) extended yesterday’s decline as consumer confidence weakened substantially. Today, France and Italy will publish production data and the European Commission will release its summer economic forecast/update. However, the focus for (EUR/USD) trading will be on Fed Powell’s hearing before Congress. Fed chair will probably stay close to the language of the June meeting, supporting a modest, pre-emptive rate cut at the end of July. If Powell, sounds less engaged on (the pace of) additional rate cuts later year, US yields rise a bit further and the by-default USD bit might continue. Still we assume any further USD gains to remain limited. Last week, EUR/USD drifted lower in the 1.11/1.14 range. First key support comes in at the 1.1181 (correction low). This level might come under test if Powell keeps a modest/balanced tone. A break would open the way for a return to the year lows (1.1100/10 area). A rebound to the 1.13 would ease the downside momentum.
Yesterday, sterling remained in the defensive as persistent political uncertainty, signs of a further cooling of the UK economy and technical factors all conspired against the UK currency. EUR/GBP tested the 0.90 barrier. Today, the monthly GDP estimate, and the UK production data are interesting. The UK Parliament yesterday voted a measure to make it more difficult for the new UK PM to bypass parliament on a Brexit deal, but the road to Brexit remains highly uncertain. We don’t expect any sustained sterling rebound anytime soon.
EUR/USD: drifting lower in the 1.14/1.11 trading range. Will Powell’s testimony trigger a test of 1.1181?
