Rates: US 10-yr yield tests 2.8% support
The US 10-yr yield tests 2.8% support as Fed chair Powell signaled no intention whatsoever to step up the Fed’s gradual rate hike cycle. Positive risk sentiment is negative for core bonds today, but traded volumes will be low with UK markets closed for Summer bank holiday. The eco calendar only contains German IFO business sentiment.
Currencies: Dollar eases further as Powell gives balanced assessment
The dollar remained in the defensive on Friday as Fed’s Powell indicated that there was no reason to step up the pace of policy normalization. Today’s eco calendar is modestly interesting. The PBOC taking action to stop the decline of the yuan suggests no USD rebound anytime soon
The Sunrise Headlines
- US stock markets did well on Friday, with all indices closing in green and the NASDAQ (+0.86%) outperforming. Asian markets opened strong this morning, with China outperforming the bunch with 2% gains.
- The US and Mexico are close to reach an agreement on lengthy bilateral trade talks. An agreement is expected to be delivered today, paving the way for Canada to re-join the negotiations to revamp NAFTA.
- US President Trump has abruptly canceled Secretary of State Pompeo’s visit to North-Korea. He acknowledged for the first time that they are stalling their denuclearization. Meanwhile, North Korea accused the US of “double-dealing”.
- German Finance Minister Olaf Scholz announced that the public sector debt in Germany could fall below the EU’s debt ceiling before the end of the year. His statements came after German figures this week showed a record surplus.
- French President Macron will start a new wave of reforms, targeting social spending as weaker than expected growth puts pressure on the budget deficit. Macron is thus turning a deaf ear to criticism on earlier reforms.
- EU member states failed to deliver on the migration deal made with Italy in June after talks in Brussels last week. Italy’s PM Conte now announced it will start the process of opposing the EU’s next budget.
- Today’s eco calendar proves to be very thin. While the UK is closed due to a Summer bank Holiday, IFO business sentiment will be released in Germany
Currencies: Dollar Eases Further As Powell Gives Balanced Assessment
‘Balanced Powell’ doesn’t help the dollar
The dollar remained in the defensive on Friday. USD/CNY came already under pressure in the run-up to Powell’s speech at the Fed Jackson Hole symposium and weighed on the overall USD performance. Powell’s assessment was balanced (economy to stay strong, but no clear sign of the economy overheating and/or inflation accelerating). FX markets gave more weight to the dovish accents in his story. EUR/USD returned north of 1.16 and closed the week at 1.1622. USD/JPY finished the day marginally softer at 111.24 despite a good equity performance.
This morning, the (trade-weighted) dollar is holding near recent lows. The PBOC reintroduced a contra-cyclical buffer for its daily Yuan fixing mechanism. De facto, it will reduce in impact of market forces, indicating the Bank’s intention to prevent further sharp CNY losses. The move helps to support a positive risk sentiment in Asia. EUR/USD stabilizes in the 1.1620/50 area. USD/JPY dropped below the 111 mark.
Later today, US eco data are second tier. German IFO business confidence is expected to stabilize/rebound slightly after a gradual decline over the previous month. A constructive equity sentiment probably is slightly more supportive for the euro than for the dollar.
In a broader perspective, the dollar reversed the early August gains against the euro and returned in the previous 1.15/1.18 consolidation pattern. The USD reaction to Friday’s comments from Fed’s Powell indicates that the USD momentum has eroded further. China ‘preventing’ further CNY losses is a slightly USD negative too. In this context EUR/USD might maintain a cautious upward momentum, but a break beyond the 1.1750/91 resistance is unlikely for now.
On Friday, EUR/GBP retested the key 0.9033 resistance area. Investors were apparently not impressed by the contingency plans from UK brexit minister Raab to address the consequences of a no-deal brexit. The debate on all kinds of emergency matters only reinforced investor fears that political tensions might continue to dominate the market headlines as the time to finalize an agreement is becoming tight. The EUR/GBP rally might take a breather short-term as a sustained break of the 0.9033 area might not be that easy. That said, the UK currency will probably remain in the defensive unless there comes really good news (from brexit or from strong UK eco data). We don’t expect that to come anytime soon. UK markets are closed for the summer bank holiday today.
EUR/USD: Powell’s balanced assessment weighs on the dollar. EUR/USD returns to previous range
