Rates: New warning about stagflation by Fed Powell?
Disappointing Netflix earnings could hurt risk sentiment today. The eco/event calendar focusses on Powell’s testimony. Last week, he warned that the worst case outcome of the trade war is stagflation. More comments in that direction could be interpreted dovish and support the US Note future even if he’ll stick to the Fed’s gradual rate hike approach.
Currencies: Will ‘softer’ Powell support a further USD correction?
The dollar lost slightly ground yesterday despite decent US retail sales. Focus turns to the Fed Powell’s semi-annual testimony today. The dollar might lose some further ground if the Fed president warns on the potential impact of the trade war on the US economy. EUR/GBP is still paralyzed in the 0.88 area as the Brexit-stalemate persists
The Sunrise Headlines
- US equities ended mixed yesterday with the Dow recording small gains (+0.18%) while the Nasdaq underperformed (-0.26%). In Asia, Japan is trading in green (+0.85%). China is losing ground (-1.08%).
- FAANG club member Netflix plummeted 14% post-market after its Q2 reporting. Subscriber growth disappointed as did its outlook for the current period. The drop suggests a lower opening for the technology stocks/Nasdaq.
- Oil prices fell by more than 4% yesterday as markets focus on supply. Libyan oil terminals are reopening and the US said it could draw upon its strategic reserves. The latter are also considering country requests to import Iranian crude, despite America’s total boycott demand, easing (Iranian) supply fears.
- According to the IMF, escalating trade tensions are a threat to a global growth that is already losing momentum. While it did not change its global growth forecasts, it warned global output could drop by 0.5% by 2020 if trade barriers would become reality.
- The UK government on Monday accepted the Brexiteer amendments to May’s initial Brexit proposal, toughening the country’s negotiating stance with Brussels.
- Russian President Putin said talks with his American counterpart were a success after he seemingly convinced Trump “the Russian state has never interfered and is not going to interfere in US internal affairs”.
- Today’s economic calendar provides US industrial production and UK labour data. J&J (12:45) and Goldman Sachs (13:30) publish Q2 results. Fed’s Powell testifies before the Senate. BoE’s Carney, Cunliffe and Stheeman speak. Germany taps the bond market
Currencies: Will ‘Softer’ Powell Support A Further USD Correction?
Softer’ Powell to cause further USD correction?
Yesterday, the dollar traded with a tentative negative bias but moves were limited. US retails sales were strong and suggest solid Q2 growth but had no lasting impact on the dollar. A sharp new down-leg of oil also didn’t help the US dollar. EUR/USD closed at 1.1711 (from 1.1685). USD/JPY finished at 112.29 (from 112.38). There was also a lot of turmoil on president Trump’s diplomacy in Russia, but it had no noticeable impact on (FX) markets. Overnight, Asian equities are mostly in negative territory. Lingering trade tensions, a sharp decline of oil and a setback in the Nasdaq future (disappointing Netflix results) are weighing. Still, the the major USD cross rates are holding tight ranges with EUR/USD near 1.1720 and USD/JPY near 112.40. New Zealand headline inflation was slightly softer than expected, but the kiwi dollar profited from a rise in a core measure closely monitored by the RBNZ. NZD/USD rebounded to the 0.6840 area. A tentative sign of a bottoming out process for the kiwi? Today, the eco calendar is thin with only US production data. Production is expected fairly strong at 0.5% M/M. However, the focus for FX trading will be on the semiannual testimony of Fed Powell before the Senate. At the June meeting, the Fed was positive on the economy and the dots signalled a rising chance of 2 additional rate hikes this year. The Fed president probably won’t backtrack on his positive view, but there is also no reason to reinforce the scenario of two additional hikes in a context of rising trade tensions. If so, the dollar won’t get much additional interest rate support. EUR/USD is holding the 1.15/1.1850 trading range. As the downside looks blocked, there maybe is room for EUR/USD to go back higher in the range.
Yesterday, UK PM May again faced a turbulent session in Parliament. The row between pro-Brexit support and support of a soft Brexit hardened as the government accepted amendments from the pro-Brexit camp to the Customs bill. The Brexit noise propelled EUR/GBP back higher to the 0.8850 area. Today, the UK labour data will be published. The focus remains on wage growth. A decent report might be enough for the BoE to raise rates in August. However, wage growth probably has to bring a big upside surprise to trigger any sustained GBP gains. The Brexit sage continues in Parliament (Trade Bill). As the Brexit chaos won’t disappear soon, we see little reason for a sterling comeback. More consolidation in the EUR/GBP 0.88 are might be on the cards.
EUR/USD: holding in the middle of established range. Will ‘soft’ Powell assessment weaken the dollar?
