EUR better bid as investors re-price ECB first rate hike
The greenback lost ground on Thursday as investors started to question the narrative that trade tensions would be dollar positive. The dollar index slid 0.20% to 94.35 amid a broad rally of its G10 peers. The single currency rose 0.30% against the buck after German factory orders unexpectedly surged 2.6%m/m in May, widely beating forecast of 1.1%. Previous month’s reading was also upwardly revised to -1.6% from -2.5%. This is the first time this year that the gauge came in positive territory, suggesting that the weakness of the start of the year was only temporary.
In addition, there are some rumours that ECB members believe that a rate hike around the end of 2019 would be “too late”. This development provided a much-needed push to the euro. German yields rose across the curve with the 2-year yield increase 3bps to -0.63%, while the 10-year one added 3.3bps to 0.336%. Despite an improving risk sentiment across financial markets – equities are blinking green across the board – there is a good chance the euro’s gains will prove short-lived, as investors are getting nervous ahead of trade tariffs deadline. Indeed, both the US and China said the tariffs take effect on July 6.
Watch the Fed’s minutes
At 14.00 Washington DC time today, the US Federal Reserve will publish the minutes of its June meeting on monetary policy. This will drive the USD and US yield curves. Economic growth continues to accelerate, despite expectations of a cyclical slowdown. This increases the probability of additional rate hikes – perhaps a fourth one late this year. Also interesting will be the Fed’s view on trade and inflation.
Impact on G10 currencies should be limited, since the Fed’s tightening cycle is already priced in. Still, emerging market, interest rate sensitive currencies should come under pressure. Currencies with significant USD liabilities such as TRY and INR are extremely exposed.
