Rates: Improvement in risk sentiment today’s main market driver?
Core bonds are expected to start the week on the soft side given the improvement in risk sentiment and this week’s thin eco calendar. Today’s highlight is ECB Draghi’s speech in front of European Parliament. We expect him to hold the line of the June policy meeting. Explaining the semantics of the new forward guidance in greater detail is a wildcard.
Currencies: EUR/USD extends rebound due to risk-on sentiment and soft US wages
EUR/USD developed a bottoming out process last week. This pattern was reinforced Friday. Soft US wage growth weighted on the dollar and an improved risk-sentiment was also EUR/USD positive. EUR/USD regained 1.1720 resistance. EUR/USD 1.1850 is the next reference on the charts. Ongoing Brexit noise continues to affect sterling
The Sunrise Headlines
- US equity markets ended the week in green with gains ranging from 0.4% (DJI) to 1.3% (Nasdaq). Asian stock markets are performing very well this morning, suggesting an easing in trade war tensions. China (+2%) outperforms.
- Britain’s pro-Brexit secretary Davis and his deputy Bakern resigned from the government two days after PM May pushed through her Brexit-strategy. It could trigger a Tory revolt against May’s plan, dubbed a ‘Brexit in name only’.
- North Korean state media called US Secretary of State Pompeo’s Pyongyang visit ‘regretful’. They said the US did not mention establishing a peace regime on the Korean Peninsula, which is essential for the country to denuclearize.
- Russia has imposed tariffs of 25 to 40% on some US imports, including oil and gas equipment and fibre optics. The tariffs are ought to compensate (only) $87.6m of the $537.6m hit Russian exporters are expected to take.
- China is offering the EU a preferential treatment and wants to speed up the investment negotiations that started in 2013. The move is seen to form a front against the US trade policy.
- ECB’s Coeuré said the ECB is wary of any trade war escalation, but added that ‘what we’ve seen doesn’t have potential to derail the recovery’ and that there is ‘no reason to change policy expectations.’
- Today’s eco calendar contains only secondary data as the EMU Sentix Investor Confidence (July) and German imports/exports are released. ECB’s Nowotny (13:00) and Draghi (15:00) are scheduled to speak.
Currencies: EUR/USD Extends Rebound Due To Risk-On Sentiment And Soft US Wages
EUR/USD extends rebound on soft US wages
Last week’s ST reversal suggesting a stronger euro and an easing of the dollar continued on Friday. Sentiment on risk improved further even as the US and China imposed mutual import tariffs, taking some shine off the dollar. The USD lost further ground after the payrolls. Job growth was solid, but wages disappointed again. The USD probably won’t get much additional interest rate support soon. EUR/USD cleared the 1.1720 level and closed at 1.1746. USD/JPY also lost a few ticks despite a positive risk sentiment and finished the session at 110.47.
This morning, sentiment on risk stays constructive. Markets apparently feel confident that the further negative impact from the US-China trade conflict will remain manageable. Balanced US payrolls with a softer dollar and no need for the Fed to step up the pace of rate hikes is also positive for Asian/EM sentiment. The trade-weighted dollar is drifting back south below the 94 barrier. EUR/USD is changing hands at around 1.1760. Comforting comments from ECB’s Coeure during the weekend are a slightly euro positive, too. USD/JPY still hardly profits from the risk-rebound. The pair hovers in the mid 110 area.
Today, the eco calendar in the Europe and the US is almost empty except for some ECB speeches with ECB president Draghi attending a hearing before the European Parliament. (FX) markets will be keen to hear anything he eventually has to add to the debate on the timing of a first rate hike. He will probably hold to the message the ECB gave after the June policy meeting. At the same time, he might keep the door open for an early (September) rate hike (data dependent). At the end of last week, we indicated that the fortunes for EUR/USD probably changed at least ST unless the payrolls would be very strong. Soft US wage data opened the way for EUR/USD to break beyond the 1.1720 resistance. In a positive risk context, some further EUR/USD gains are possible. 1.1850 is the next technical reference on the charts.
On Friday, it looked that UK PM reached a consensus on a plan for a rather soft Brexit. However, UK Brexit Secretary Davis and two other ministers resigning this the weekend, suggest that the Brexit stalemate hasn’t been solved yet. EUR/GBP declined temporary to the 0.8810 area this morning, but trades again in the 0.8850 area. For now, we don’t see a trigger for a sustained sterling rebound. In case of further EUR/USD gains, EUR/GBP might also drift further north toward the 0.89 barrier.
EUR/USD extends rebound as risk sentiment improves and as soft US wages weigh on USD.
