Rates: Core bonds locked in narrow ranges
The US 2-yr yield closed above 2.6% for the first time since 2008 yesterday after Powell’s bullish testimony before US Congress. Core bonds generally remain resilient though, also withstanding a further improvement in risk sentiment. Today’s calendar is unlikely to unlock these low-volume, sideways trading conditions.
Currencies: Powell sees economic resilience. Dollar rebounds
Yesterday, fortunes turned again in favour of the dollar as Fed’s Powell sees no big obstacles for the Fed to continue gradual policy normalization. EUR/USD turned back lower in the established trading range. USD/JPY outperforms. Sterling remains in the defensive as the Brexit chaos on the UK persists even as PM May survived a key Parliamentary vote.
The Sunrise Headlines
- US stocks ended in green on Tuesday (0.2% – 0.6%), enjoying Powell’s upbeat assessment before the Senate. Following WS, Asian stock markets are currently trading in positive territory. Japan outperforms (+0.7%).
- UK PM May lives to fight another day as she narrowly survived (307-301) a pro- European Tory rebel amendment to keep the UK in a customs union with the EU.
- EC Juncker will meet US President Trump next week, seeking negotiations on reducing car tariffs under a so-called plurilateral sectoral deal in an attempt to head off a US probe into whether imports of cars threaten national security.
- Japan and the EU signed a free trade pact, removing EU tariffs on Japanese cars and car parts and scrapping Japanese duties on EU cheese and wine. They also closed a deal to allow the free flow of personal data between the two blocs.
- Under his two-year economic plan presented to the parliament yesterday, Spain’s new PM Pedro Sánchez will raise corporate taxes and slow the country’s deficit reduction to increase room for public spending.
- Fed’s George (hawk) took a more moderate stance overnight, saying the Fed should lift interest rates up far enough to prevent unwanted inflation but not too fast so as not to slow the economy, given the uncertainty over the outlook.
- The eco calendar contains US housing data and June inflation in UK and EMU (final). The Fed releases its beige book. Powell appears before the House. Morgan Stanley, Alcoa and eBay release earnings. Germany taps the market
Currencies: Powell Sees Economic Resilience. Dollar Rebounds
Powell stays optimistic. USD rebounds
Yesterday, the dollar started on a soft footing. EUR/USD tested the 1.1745 area. The greenback regained the lost territory ahead of Fed’s Powell testimony. Powell was outright positive on the US and even on the global economy. He also wasn’t too worried on the impact of the trade tensions or on the flattening of the yield curve. US yields rose marginally. The 2-yr yield set a minor cycle top. The dollar extended its intraday rebound. EUR/USD finished at 1.1661. The USD/JPY rebounded more forcefully with the pair heading to the high 112 area, supported by a revival in risk sentiment. Overnight, Powell’s positive message also supports Asian equities. The dollar extends its rebound albeit at a slower pace. The trade-weighted USD regained the 95 level. USD/JPY is testing 113. EUR/USD trades near 1.1650. For now, the strong USD has little effect on EM/Chinese markets. USD/CNY (6.71 area) is holding near the recent peak. Today, the eco calendar is thin with only US housing data and the final EMU CPI. Powell will attend the second part of his Congressional hearing before the House, but it isn’t Powell’s style to amend yesterday’s assessment. So, global risk sentiment and the ‘fall-out’ from Powell’s assessment will set the tone for global FX trading. The Fed Beige book is a wildcard. At the end of last week and early this week the dollar was losing momentum. However, yesterday’s optimtic view from Powell again supports the dollar. At the same time, the rise in US yields (and thus the interest rate support for the dollar) remains modest. EUR/USD is locked in the 1.1510/1.1850 range. It looks that the topside is blocked for now. USD/JPY is better bid. Intermatiate reistance comes in at 113.75 ahead of the 114.75/115.51 range top.
Yesterday, UK labour data were mixed with only a temporary positive impact on sterling. The focus for sterling trading was on yet another Key Brexit vote. May survived the vote as an important amendment from pro-EU rebels was narrowly rejected. Sterling was under pressure ahead of the vote, but rebounded afterward. However, EUR/GBP still closed the day at 0.8890. Today, UK June headline CPI is expected rise to 2.6%. Core inflation might decline to 2.0%. The data probably won’t change BoE rate hike expectations in a profound way. However, even after yesterday’s events, the Brexit chaos persists. The decline of sterling might slow, but we see no reason for a sustained rebound
USD (trade-weighted –DXY) returns to 95 resistance are as Powell stays optimistic on the economy
