Rates: Key central bank meetings looming
Core bonds eventually ended near opening levels on Friday as EM assets managed a late rebound. This week’s event calendar is loaded with the US/North-Korean Summit, Fed and ECB meeting. The Fed might hint at stepping up the tightening cycle, while we expect the ECB to announce an end to QE by end 2018.
Currencies: euro to be better bid going into ECB and Fed policy meetings?
FX traders are looking forward to the Fed and ECB policy meetings this week. Both central banks might sound relatively hawkish. However, the ECB potentially preparing markets for a the end of APP bond buying might be the more important factor for FX markets. Sterling trading faces a series of important eco data and a key vote on Brexit in Parliament
The Sunrise Headlines
- All US markets closed in green before the weekend with no real outliers. This morning, Asian stock markets are opening mixed. Only in Japan we see all markets reaping gains.
- The relations between the US and its allies plunged after the G7 summit this weekend. With a strong German-French critique on Trump’s imposed tariffs and a US backlash at Canadian PM Trudeau. No unanimous G7 communiqué was signed.
- In a referendum on Sunday, Swiss voters have strongly rejected the ‘Vollgeld’ proposal, which would disarm Swiss banks’ ability to create money when giving loans to customers and businesses.
- North-Korean leader Kim Jong Un and US President Donald Trump have landed in Singapore for their historic summit of tomorrow. The pair will discuss whether a possible denuclearisation deal is achievable in the near future.
- Giovanni Tria, Italy’s new finance minister, has assured EU officials that a scenario where Italy will exit the euro is not on the agenda. He said “the new government is clear and unanimous to keep the country inside the euro”.
- In China, the inflation numbers were released on Saturday with a CPI (YoY) of 1.8% (1.8% expected) and a PPI (YoY) of 4.1% (3.9% expected). These numbers are not expected to move policy directions.
- On the economic calendar today we only see the UK with the release of Industrial Production MoM/YoY and Manufacturing Production MoM/YoY for April.
Currencies: Euro To Be Better Bid Going Into ECB And Fed Policy Meetings?
EUR/USD better bid going into policy meeting
On Friday, trading started in a cautious risk-off modus as EM currencies remained under pressure. The unwinding of EM carry trades favoured the dollar. EUR/USD tested the 1.1830/40 resistance area on Thursday, but the test was rejected and USD strength pushed EUR/USD back south in the 1.1510/1.1830 range. However, risk off and the dollar rally eased in US dealings. EUR/USD closed the session at 1.1769 (from 1.1800). The initial save haven bid slightly supported the yen, but the swings in USD/JPY were modest. The pair closed the session at 109.55. Overnight, sentiment in Asia turned cautiously positive. Pressure on most EM currencies is easing slightly, at least for now. There is only little fall-out from the G7 meeting, which shows quite some political division between US and the rest of the group. USD/JPY gains modest ground. (109.80 area). At the same time the euro outperforms. EUR/USD is trading near 1.18. The Italian Fin Min reiterated that an Italian euro exit is not on the agenda.
Today, mostly contains second tier data. Markets will mainly look forward/adapt positions ahead of the Fed policy decision (Wednesday) and the ECB meeting (Thursday). The meeting of president Trump with North Korean leader Kim Yong Un and headlines on the trade conflict between the US and its allies are wildcards for trading. Last week, EUR/USD bottomed and gradually regained some ground. Tensions on Italy moved to the background and the ECB indicated that it is coming closer to a new step in policy normalisation. Both the Fed and the ECB might sound relatively hawkish. Recent US eco data might support the case for two additional rate hikes after a hike this week. However, the ECB preparing markets for the end of APP bond buying in September might be more important for FX markets than the Fed holding course. In this context we assume that markets won’t be keen to be euro short going into the ECB meeting. EUR/USD breaking beyond the 1.1830/40 resistance might support the some further euro gains going into the ECB & Fed meetings.
On Friday, euro strenght and uncerainty on the Brexit proces supported the EUR/GBP cross rate. The pair returned to the high 0.87 area. This week, the UK eco calendar contains key eco data and the house of Commons will vote on key Brexit issues. For now, there is no indication that UK PM May will be able to put a consistent Brexit strategy in place. We assume sterling to stay weak as long as this uncertainty persists.
EUR/USD: euro downside might be well protected as markets look forward to change in ECB guidance
