- Rates: Downward intraday bias for core bonds
Improved risk sentiment might weigh on core bonds. Italian media suggest that the EC is willing to accept a 2% Italian deficit for next year. This seems negotiable after Italian political leaders opening move to allow some changes and might put the budget drama soon behind us. US Fed chair Powell is expected to paint a bright picture of the US economy. - Currencies: Dollar maintains benefit of the doubt ahead of Powell speech
Negative headlines on the US-China trade negotiations and constructive comments from Fed’s Clarida were enough to extend recent USD upleg yesterday. The focus is on a speech of Fed’s Powell today. An ongoing positive assessment might be a mildly USD supportive. However, a positive risk sentiment and progress in the EU-Italy budget talks might prevent big euro losses.
The Sunrise Headlines
- US equity markets closed yesterday’s session with modest gains, after pairing opening losses throughout the day. Asian stocks are currently trading in green with gains up to 1.0%.
- A UK official suggested that UK PM May will allow changes by the House of Commons to her Brexit accord. Parliament will be free to vote on a series of self-proposed changes, before voting on the agreement as a whole.
- US top economic adviser Kudlow struck a hopeful tone on a possible US-China trade deal later this week at a G20 summit in Argentina, but warned that talks so far were fruitless and a new round of tariffs is likely if no progress is made.
- Cindy Hyde-Smith has won the last US Senate race, in the state of Mississippi, beating her Democrat opponent Mike Espy. Hyde-Smith’s win secured a 53 to 47 Republican majority in the US Senate.
- Ahead of next week’s UN climate talks, the EU publishes a climate strategy road map today. It outlines a range of scenarios aimed at reducing carbon emissions and preventing damaging global warming to achieve the Paris climate accord.
- New Zealand’s central bank will ease mortgage lending restrictions now and in the next years. It wants to stimulate the cooling housing market as government initiatives such as restrictions on foreign buyers are weighing on demand.
- Today’s economic calendar is rather thin with only second tier data in the US and EMU. The BoE publishes a report with the financial impact of different Brexit scenarios. Fed Powell, ECB Praet and ECB Coeuré speak.
Currencies: Dollar Maintains Benefit Of The Doubt Ahead Of Powell Speech
Dollar holding strong ahead of Powell speech
There was little high profile news to guide USD trading yesterday. Still, the dollar maintained the benefit of the doubt. US officials suggested that any formal progress on trade at the meeting between President Trump and Chinese president XI Jinping will be difficult. Uncertainty on trade is seen as negative for the euro rather than for the dollar. The US threatening to impose tariffs on all auto imports also weighed on the euro. Several Fed members also gave their view. Vice Chair Clarida kept a balanced tone and suggested Fed policy normalization can continue, providing the USD additional interest rate support. EUR/USD closed at 1.1289 (from 1.1328). USD/JPY also extended its uptrend and closed at 113.79. This morning, most Asian equity indices show decent gains even as the dollar remains well bid. So for now, the ‘usual links’ between markets don’t really work. EUR/USD struggles to regain the 1.13 handle. USD/JPY extends its gradual rise, nearing the 114 area. Later today, there are plenty of US data. However, we expect these data to be of second tier significance hours before a speech of Fed’s Powell. Markets are keen to hear concrete hints on the pace of further Fed normalisation in 2019. We expect the Fed chair to stay rather positive on the economy but he might downplay the significance of guidance as the Fed becomes more data dependent at current point in the eco cycle. This week, the dollar succeeded some further ‘by default’ gains. Longer term we remain cautious on a new sustained USD upleg. However, in a daily perspective, positive comments from Powell might extend the ST USD momentum. We had a neutral bias on EUR/USD, but have to admit that recent euro performance is a bit disappointing, given the tentative improvement in risk sentiment and more constructive headlines from Italy. We still assume the 1.1216/1.1621 trading range to hold. However, downside test of EUR/USD looks more likely than a swift return higher.
Sterling continued to trade with a negative bias yesterday. May’s tour in the country to sell her deal started in Northern Ireland. At first sight it didn’t yield any results with the DUP still rejecting the proposal. EUR/GBP closed modestly higher at 0.8859. This morning, there were rumours that the UK government is considering to allow amendments the Brexit text will be discussed in parliament. Question is whether this approach will make the process easier. EUR/GBP will probably remain in a some kind of erratic trading patter near current levels as long as uncertainty on the approval remains as high as it is right now.
EUR/USD: dollar maintains benefit of the doubt even as sentiment on risk shows signs of improvement
