Rates: Positive risk sentiment, despite trade developments
Risk sentiment is positive this morning despite the collapsed trade talks between the US and China. A thin eco calendar suggests investors will start looking forward to next week’s FOMC meeting. Recent eco data strength lifted odds of 3 more rate hikes this year. The new dot plot might reflect this given the tight call in March and puts a bottom below ST US yields.
Currencies: Easing tensions on Italy and strong US data keep each other in balance
On Friday , EUR/USD failed to regain the 1.1725 area as strong US data supported the dollar. Today, the eco calendar is thin. We see further EUR/USD gains as rather difficult and expect the dollar to be well supported going into next week’s FOMC meeting. A new flaring up of trade tensions probably won’t help the single currency as well
The Sunrise Headlines
- US markets did good on Friday, responding on the excellent macro-economic numbers that were released (ISM, payrolls). All Asian stock markets are performing well overnight, with Japan outperforming.
- A 3rd round of negotiations between the US and China ended fruitless, raising the odds of a $100bn trade war. Last week, Trump threatened to implement tariffs on Chinese industrial exports, which Beijing has promised to reciprocate.
- In Slovenia, Janez Jansa’s Slovenian Democratic Party won the elections with 25% of the vote. However, the anti-immigration party, currently in the opposition, is probably short of coalition partners.
- Berlin responded to Macron’s wide-ranging proposals on overhauling the single currency area. Rather than an instrument for fighting future financial crises, Merkel sees the EMF as a tool to strengthen budgetary discipline. She strongly excluded any debt relief measures for Italy.
- Moody’s is considering a further downgrade of Turkey, following a previous downgrade earlier this year. The current Ba2 rating is at risk due to increasing pressures on the country’s balance of payments.
- On Friday, the ISM manufacturing index rose to 58.7, which was higher than the expected 58.2 further indicating Q2 GDP will be strong, following the dip in Q1.
- On today’s calendar we find Factory Orders (Apr) in the US. In Europe, PPI MoM/YoY (Apr) are released.
Currencies: Easing Tensions On Italy And Strong US Data Keep Each Other In Balance
EUR/USD rebound slows as US data stay strong
On Friday, EUR/USD neared Thursday’s intraday top (1.1720/25 area) as tensions on Italy eased further, but a real test/break failed. Strong US ISM/payrolls gave a small boost to the dollar, but EUR/USD also wasn’t able to break a first support area. Improving sentiment on Europe and strong US data kept each other more or less in balance. EUR/USD closed at 1.1659 (from 1.1693). The gain in USD/JPY was bigger as the pair profited from higher core yields and from a positive risk sentiment. USD/JPY finished the day at 109.54 (from 108.82).
Today, Asian equities mostly show decent gains, joining a good close in the US on Friday. Still, there is plenty of noise on next moves in the trade-war saga between the US and its trade partners/allies. USD/JPY is trading little changed (109.65 area). The euro slightly outperforms the euro. EUR/USD is again nearing the 1.17 area.
Today, there are only second tier EMU data. ECB’s Nowotny speaks. Any comments on monetary policy will be closely watched as the June 14 ECB meeting is coming close. US orders data probably won’t change markets’ positive assessment on the economy. The gyrations in the US ‘trade strategy’ are a wildcard. At least for now, investors don’t anticipate an outright trade war. Last week; EUR/USD bottomed as tensions on Italy eased. A risk-on context favoured the euro (EUR/USD and EUR/JPY) more than the dollar. This repositioning might still go a bit further, but we don’t expect a big leap higher of the euro as long as the ECB stays muted on policy normalisation. Concrete intentions of the Italian government remain also unclear. A flaring up in trade tensions might weigh a bit more on the euro than on the dollar. On the other hand, Friday’s strong US data should prevent a big USD setback ahead of next week’s Fed meeting. EUR/USD rebounded off the 1.1510/50 area, but didn’t regain any important level. We’re not convinced of a lasting euro rebound yet. 1.1830 is the first resistance ahead of the 1.1996/1.20 area which we consider not easy to break.
On Friday, sterling regained ground against the euro, supported by a decent UK manufacturing PMI. Today, the construction PMI is expected marginally lower. Brexit will also remain in the headlines as the UK should bring some clarity on the issue before the EU summit later this month. We don’t see a strong case for further sustained sterling gains. More sideways trading in the 0.87 big figure might be on the cards
EUR/USD: good US eco data and easing EMU tensions keep each other in balance
