EUR/GBP Slightly off the Correction Top

Apr 26 17, 15:00 GMT

Headlines

European equities cede marginally ground following their 2-day rally. US stock markets opened unchanged. Earnings included Boeing, which topped estimates and raised its profit outlook, and Twitter which announced better than expected earnings and revenues, and significantly increased its active user base on the platform.

US President Trump will release a tax plan today proposing some deep rate cuts, mostly for businesses, including a slashed corporate income tax rate and steeply discounted tax rate for overseas corporate profits brought into the United States, officials said.

The US Congress was moving closer to crafting a deal to avoid a government shutdown. Some lawmakers are optimistic they can hammer out a budget bill to take the government to the end of the current fiscal year on Sept. 30, while others see Congress putting a short-term spending resolution in place for a week, while talks continue.

NZD/USD dropped below 0.69, heading towards key support at 0.6862. The kiwi dollar faces selling pressure since US president Trump tweeted that he would take action against Canadian dairy farmers who compete with US farmers. With the recent lumber import tariffs in mind and given New Zealand’s huge dairy export, NZD loses ground.

Turkey’s central bank has kept its main interest rates unchanged in April, but continued to tighten monetary conditions by raising its liquidity lending rate by 50 bps to 12.25%, its highest level since 2015.

EC President Juncker urged euro zone countries to draw up more debt relief measures for Greece next month, saying Athens needed help after making "huge progress" in its economic reforms. EMU FM’s will meet in Brussels on May 22 to discuss progress made in talks to conclude Greece’s crucial bailout review which has been delayed for months.

Rates

After the stormy weather, bonds find their composure

Following two days of hectic trading, markets, including the bond market, calmed down today. In most markets, only some bottom fishers/short coverers were active, meaning that the price action turned around compared to previous days. The Bund gradually moved higher, mostly recouping losses registered in yesterday’s after-market trading. However, the Bund stayed near yesterday’s official closure. A very temporary dip is visible on the charts when US Treasury Secretary Mnuchin spoke about the tax plan, but the dip was rapidly erased, given that no new details were unveiled. We shouldn’t qualify today’s price action as a real countermove, more a short covering ahead of tomorrow’s ECB meeting. In this respect, it isn’t strange that the US Treasuries stayed closed to yesterday’s close, trading in a narrow range too. European equities traded sideways albeit slightly below yesterday’s close.

At the time of writing, the German yield curve shifted 0.4 bps (30-yr) to 1.8 bps (5-yr) lower. Changes on the US yield curve were virtually zero (except for the 2- yr due to a benchmark change). On intra-EMU bond markets, 10-yr yield spreads widened for most credit with Spain (+4 bps) and Italy (+7 bps) underperforming, likely due to profit taking and upcoming supply.

Currencies

EUR/USD and USD/JPY fall prey to profit taking.

The combined rally of EUR/JPY, USD/JPY and EUR/USD still continued in Asia this morning, but the post-Macron risk-on trade slowed in Europe. This caused also some profit taking on the euro as investors reduced positions ahead of the Turmp tax plan and the ECB policy statement tomorrow. EUR/USD trades currently in the 1.0885 area. USD/JPY is holding in the mid 111 area, awaiting the details of the Trump tax plan. There were no data to guide trading.

Overnight, Asian markets equities eked out some additional follow-through gains on yesterday’s risk rally. In line with the price action after the outcome of the first round of the French presidential election, the risk-on sentiment was supportive for EUR/USD and USD/JPY. USD/JPY filled offers in the mid 111 area. EUR/USD revisited yesterday’s intraday top in the mid 1.09 area . The global picture for the dollar remained fragile. The trade-weighted dollar struggled to keep above the 99/110 support area.

The post-Macron risk rally finally slowed in Europe this morning. European equities showed only marginal profit taking. Even so, the risk rally took a breather and that inspired also incremental profit taking other markets that experienced a substantial repositioning earlier this week. In the currency market, EUR/JPY longs were the evident place to lock in some profits. In this move, EUR/USD also declined from the 1.0950 area to return below the 1.09 handle around noon. The USD/EMU interest rate differential moved slightly in favour of the dollar, but we doubt it was an important driver. We assume it was simple profit taking. Investors maybe avoided to be too much EUR/USD long ahead of double event of the Trump Tax plan and tomorrow’s ECB meeting. The correction in USD/JPY was much more modest. The pair easily stayed north of 111.

Early in US dealings, the dollar spiked temporary higher against the yen and, to a less extent against the euro, as US Treasury Secretary Mnuchin confirmed that the Trump tax plan would include a reduction of the business tax to 15%. However, markets want to see the concrete details of the plan first. So USD/JPY trades slightly off the intraday highs (currently 111.45 area). EUR/USD hovers in the 1.0880/85 area. USD trading understandably is very nervous/volatile as long as the Trump tax plan isn’t available yet. At least for now, markets are inclined to expect that it could be enough to put a floor for the dollar. To be confirmed….