- Rates: Will EMU inflation readings further undermine Draghi’s view?
EMU inflation readings risk undermining ECB President Draghi’s rhetoric about vigorous upward core inflationary pressures ahead after eco data already tackled his view on the “temporary” economic dip. The combination could cause dovish positioning into the December 13 ECB meeting. The Trump/Xi Jingping meeting might keep some investors at bay today. - Currencies: Dollar decline slows ahead of Xi-Trump meeting
The USD remained in the defensive after Friday’s perceived soft comments from Fed Powell, but soon showed tentative signs of a bottoming out process. Soft EMU inflation data are a risk for the euro today. However, currency markets will keep a close eye at the Xi-Trump meeting. A positive outcome might be (moderately) EUR/USD supportive.
The Sunrise Headlines
- US stock markets (-0.25%) couldn’t build on Thursday’s impressive gains suggesting some over interpretation of Fed Powell’s comments. Most Asian bourses cling to small gains with Korea and Australia underperforming.
- FOMC Minutes pave the way for a December rate hike, but show that the Fed might reduce its forward guidance by changing the reference to “further gradual rate hikes” into something more related to data dependence.
- The Fed might cut the IOER (interest on excess reserves rate; 2.2%) ahead of the December meeting to keep the Fed funds rate, which has risen to the IOER well within the 2%-2.25% target range
- The WSJ reports that the US and China are exploring a trade deal with the US holding off additional tariffs through spring in exchange for talks looking at big changes in Chinese economy policy.
- The Bank of Korea hiked its policy rate for the 1st time this year and the 2nd time this cycle, from 1.5% to 1.75%, to ease financial imbalances. Two dissenters pointed to high economic uncertainty, but policy is still seen as accommodative.
- November Chinese PMI’s fell more than expected in the services (53.4) and manufacturing (50) sector. Mixed Japanese data showed an uptick of the jobless rate (2.4%), unchanged inflation (1% Y/Y) and strong production (1.9% M/M).
- Today’s economic calendar contains EMU inflation and unemployment rate, Chicago PMI and speeches by Fed Williams, ECB Mersch and ECB Coeuré. G20 leaders convene in Buenos Aires.
Currencies: Dollar Decline Slows Ahead Of Xi-Trump Meeting
Dollar decline slows ahead of Trump-Xi meetig
Global (FX) markets adapted positions yesterday in the wake of Thursday’s perceived soft Powell comments. However, the ‘Powell momentum-trade’ eased rather soon. Equities ran into resistance, the decline in US yields halted and so did the setback in USD. US spending en income data were OK, but price deflators marginally softer than expected. EUR/USD retested the 1.14 area, but the USD prevented further losses. The Fed minutes suggested the FOMC will act more data dependent next year. There was no big market reaction. EUR/USD closed the day at 1.1393. USD/JPY also bottomed after an initial decline in Asian trading, despite the erosion of equity sentiment. The pair finished at 113.48. Trading on most Asian equity markets develops in a guarded fashion overnight as investors await the outcome of the meeting between President Trump and Chinese President Xi Jinping. The official Chinese PMI’s were below consensus and suggest a further slowdown, but had no big impact on trading. The (tradeweighted) dollar is going nowhere.
Today’s eco calendar contains the Chicago PMI and EMU inflation. Fed Williams speaks in New York. EMU inflation is expected to ease from 2.2% to 2.1% (core stable 1.1%). A negative surprise, especially in the core measure, might question the ECB’s intentions to normalize policy. However, the impact on EUR/USD might be modest with markets also pondering the Fed rate hike path. Global FX markets will proably stay in wait-and-see mode awaiting any progress in the Chinese-US trade dispute. A construtive outcome might be slightly EUR/USD positive.
Wednesday’s Powell comments capped recent USD strength, allowing EUR/USD to rebound in the 1.1217/1.1621 range. Some more USD softness might be on the card, but we don’t expect the USD to weaken beyond key technical levels. Interest rate markets are already positioned for a very soft 2019 Fed scenario (about one hike). We don’t expect a EUR/USD topside break anytime soon. Sterling declined further yesterday as UK PM May formally repeated that the rejection of her Brexit plan will likely result in a chaotic no deal scenario. EUR/GBP rebounded north of 0.89. Of late, there is ever more talk that a rejection of May’s Brexit deal might lead to a second referendum on the issue. However, for now, the path toward the Brexit vote and its possible consequences is too foggy for markets to already draw any positive conclusions for sterling.
EUR/USD returns into ‘neutral’ territory after Fed Powell’s comments
