Markets
Today’s European bond trading was confined to narrow ranges, largely ignoring disappointing French Q2 GDP data (0.2% QoQ 1.7% YoY vs. 0.3% and 1.9% expected). European bonds held on to yesterday’s modest gains following the ECB. At the time of writing, German bund yields are close to unchanged as are most intra EMU-spreads. Greece outperforms (-3bps). Markets showed more interest in US data however. US Q2 GDP growth increased 4.1% QoQ (annualized). While markets expected a 4.2% rise, Q1 growth was revised upwardly. Amongst the contributors were strong(er than anticipated) personal consumption (2.69%), business investment (0.94%) and net exports (1.06%). Inventories were a drag (-1.0%). Price data came in mixed as Q2 core PCE disappointed somewhat (2.0% vs. 2.2% expected). The US yield curve bull flattened after the release with yield changes varying from -3 bps (10-yr) to -1 bp (2-yr). The more muted response at the short end of the curve suggests markets so far do not profoundly question the two additional hikes in 2018 as implied by the Fed’s dot plot.
This morning, EUR/USD continued trading with a negative bias, extending yesterday’s slide. Investors apparently didn’t want to be positioned short-USD going into the US Q2 GDP release. Even so, the EUR/USD decline maybe also included some underlying euro weakness. Yesterday’s relatively soft ECB guidance and disappointing Q2 French GDP growth were potential euro negatives, too. EUR/USD traded in the 1.1625 area going into the GDP release. The US Q2 GDP growth indeed printed strong at 4.1% Q/Qa. The release was close to expectations, but the composition of the report was strong. Price indicators were mixed. The reaction the dollar was modest, in line with interest rate markets. The USD currency even envisaged a small buy-the-rumour, sell-the-fact reaction. The pair trades currently in the 1.1650 area. USD/JPY is also losing modest ground after the release (US equities don’t profit). The pair is again trading in well-know-territory in the 111 area. To summarize: US GDP Q2 GDP growth was strong as expected. However, the FX market was already positioned for a strong report, causing a modest reaction.
Trading in sterling was mainly driven by technical considerations. Cable declined slightly this morning as the dollar rallied ahead of the Q2 GDP US GDP release. In this move sterling even outperformed the euro. The pair recovered however, now trading above opening levels. Press articles/market headlines elaborated in extenso on the EU rejecting PM May’s proposal on the future trade relationship between the EU and the UK. However, the direct impact on sterling trading remained limited with EUR/GBP changing hands in the 0.8885 area.
News Headlines
The ECB Survey of Professional Forecasters (July) indicates that eurozone inflation could accelerate faster than earlier thought, with headline inflation seen at 1.7% this year and in 2019 and 2020. The figures for 2018 and 2019 were upwardly revised from 1.5% and 1.6% respectively three months ago, supporting the ECB’s decision to start policy normalization. The forecast for 2020 was left unchanged.
For the first time since the Brexit referendum, British voters favoring a new referendum on the final terms of any Brexit deal are now in majority, a YouGov poll showed . In the event of a referendum on Britain’s EU membership, the view of most voters on leave/remain has not changed. They are also increasingly unhappy with PM May.
Swedish retail sales unexpectedly decreased in June (-1.8% m/m). A stabile number was expected after already a disappointing result in May (-0.1% m/m). Earlier this week, May unemployment rose 6.3% from 6.1%. The Swedish Crown suffered after the release. EUR/SEK rose about 0.5%. The pair is changing hands in the 9.30 area.
