Rates: ECB President Draghi lifts EU rates
The German 10-yr yield closed above 0.5% and at the highest level since May yesterday after hawkish inflation comments by ECB president Draghi. US yields remain upwardly oriented as well in the run-up to tomorrow’s FOMC meeting. Today’s eco calendar contains second tier US data, ECB speeches and US supply. Core bonds probably won’t escape the selling pressure.
Currencies: EUR/USD fails to maintain gains from hawkish Draghi comments
Yesterday, EUR/USD again neared the topside of the MT consolidation pattern. However, a real test of 1.1850 didn’t occur. Today, FX traders probably will keep a wait-and-see approach ahead of tomorrow’s Fed policy decision. USD/JPY (and EUR/JPY) outperform on rising EMU and US yields.
The Sunrise Headlines
- US equity markets closed yesterday’s trading session with losses. Only technology shares (NASDAQ -+0.08%) remained in green. Asian exchanges opened mixed with China underperforming and Japan beating the bunch.
- Chinese Vice Commerce Minister Wang Shouwen said it is difficult to proceed with trade talks with the US when Washington is “putting a knife to China’s neck”. He added it depends on the will of the US to restart trade talks.
- Argentina President Mauricio Macri said he is confident in passing the IMF-backed “zero deficit” budget in congress. The country is also negotiating additional funds with the IMF (+$3-5bn) to raise its current $50bn credit line.
- A spokesman for the UK’s main opposition Labour Party has expressed that his party is likely to vote against any deal Prime Minister Theresa May will possibly close with the EU. He said it is unlikely that any deal will meet his party’s tests.
- President Trump signed a revised free-trade pact with South Korea yesterday. The US is also holding trade talks with EU and Japanese trade officials in the coming days at the sidelines of the UN meeting this week in New York.
- Iranian President Hassan Rouhani warned US President Trump that hostile policies in regard to Iran’s oil export is “very dangerous”. Rouhani, also in Washington this week (UN summit), said to be willing to meet Trump.
- Today’s eco calendar contains US housings data, Richmond Fed manufacturing index and consumer confidence. In Europe, ECB’s chief economist Praet and Coeuré speak. Italy and the US tap the bond market
Currencies: EUR/USD Fails To Maintain Gains From Hawkish Draghi Comments
EUR/USD hardly profits from hawkish Draghi.
Yesterday, there was initially no unequivocal story to guide FX trading. Risk sentiment turned more cautious, but the usual risk-off reaction in FX didn’t occur. The euro even succedeed a two-stage intraday rally. A first upleg occurred after a stronger than expected German Ifo confidence. In the afternoon, the euro was propelled by hawkish inflation comments from ECB’s Draghi. EUR/USD tried to regain the 1.18 big figure, but the move again couldn’t be sustained. US yields also maintained an upward bias, partially neutralizing the hawkish message from ECB’s Draghi. EUR/USD closed the day at 1.1748, little changed from Friday. USD/JPY continued to profit from higher core yields closing at 112.80. Overnight, Asian equities are trading mixed with Japan outperforming (weaker yen) and China underperforming. The USD shows cautious signs of a rebound, but at 94.35 for the trade-weighted dollar (DXY) and with EUR/USD at 1.1745, recent USD-lows are still within reach. USD/JPY remains the outperformer, nearling the 113 level. Today, there are few eco data in Europe. After the hawkish comments from ECB’s Draghi, markets will keep a close eye at speeches from ECB’s Praet and Coeure. In the US house price data and consumer conrfidence (conference board) will be published. August consumer confidence reached a multi-year peak. So, even a small setback shouldn’t worry markets too much. Unless for unexpected developments in the trade story, markets will probably hold a wait-and-see approach going into the Fed decision. Of late, the dollar mostly traded slightly in the defensive against the euro. At the same time EUR/USD wasn’t able to break the topside of the 1.13/1.1850 MT consolidation pattern. Today, more technical trading might be on the cards. Tomorrow, we assume that it is too early for the Fed to already predict a real downturn in current eco cycle. So, US reates might stay above the neutral rate for some time. Such a scenario might give the USD some downside protection.
Yesterday, sterling entered calmer waters even as plenty of Brexit noise persisted. Hawkish Draghi comments blocked an intraday decline of EUR/GBP. Today, there are no eco data in the UK. BoE’s Vlieghe gives a speech. Brexit headlines will probably remain the main driver for sterling trading. Brexit uncertainty probably won’t diminish anytime soon. In this context, we expect sterling to stay in the defensive. EUR/GBP might return north of 0.90.
EUR/USD: upside test, but no break of 1.1850 range top (yet?)
