- Rates: Payrolls, Powell and services ISM floor US yields
A strong US non-manufacturing ISM caused new weakness in US Treasuries, bear flattening the curve. Together with payrolls and Powell’s comments, the ISM probably puts a floor below US yields. Supply heats up today and might weigh additionally on bonds. Belgium probably launches a new 10-yr benchmark. Risk sentiment remains a wildcard. - Currencies: EUR/USD rebound still blocked at 1.15 resistance
FX investors still reduced USD long exposure yesterday in the wake last week’s comments from Powell on Fed policy flexibility. This morning, the USD decline is slowing, blocked by recent rise in US yields. For now, the EUR/USD resistance continues to play its role. A retest is possible is case sentiment on risk remains positive
The Sunrise Headlines
- US equity markets climbed higher yesterday with tech shares outperforming (Nasdaq +1.26%). Asian equities trade mixed with Japanese indices leading the gains. China underperforms despite positive signals of US-Sino talks.
- US Commerce Secretary Wilbur Ross, who’s leading the US-Sino trade talks, said progress was made and prospects for a deal were good. Beijing already announced that it is buying large volumes of US soy beans again.
- UK PM May is said to be seeking last-minute assurances from the EU to avoid the Irish backstop scenario. Parliament takes a vote next week on May’s deal reached with the EU, but it is unlikely that she will secure the necessary votes.
- Nellie Liang, a former US Federal Reserve economist, withdrew from consideration to join the central bank’s board of governors. She is said to have withdrawn on her own initiative and wasn’t forced out by the White House.
- Atlanta Fed governor Bostic, a non-voting member this year, lowered his rate outlook for 2019 to only one rate hike instead of two. He did add however, that the bank should continue with its plan to gradually shrink the balance sheet.
- US President Trump will address the nation tonight ‘on the humanitarian and national security issue” that has partially shut down the federal government. He will also travel to the US-Mexico border later this week.
- Today’s economic calendar eyes rather meagre with US NFIB Small Business Optimism and EC confidence indicators. Supply heats up with the US, the Netherlands, Austria, Germany and probably Belgium tapping the market
Currencies: EUR/USD Rebound Still Blocked At 1.15 Resistance
EUR/USD running into resistance ahead of 1.15
The dollar remained in the defensive yesterday. The move was mainly visible in EUR/USD. Investors scaled back USD long positions in the wake of Fed Powell’s comments on Fed policy flexibility on Friday. Initially, the US-German interest rate differential narrowed in the disadvantage of the dollar. This pattern changed after a good US non-manufacturing PMI. Sentiment on risk improved during the US session but EUR/USD stayed well bid despite an upturn in US yields. EUR/USD finished at 1.1474, but the 1.15 resistance remained intact. The picture in USD/JPY was slightly different. The pair initially hovered in the low 108 area, but rebounded after the ISM to finish at 108.72 (from 108.51). Overnight, Asian markets show a mixed picture, with Japanese equities outperforming (weaker yen). China underperforms. Global investors are looking out for the results of the China-US meeting on trade. The dollar is rebounding after yesterday’s decline, supported by higher US yields (2-yr yield is >15 bp higher compared to last week’s low). EUR/USD trades in the 1.1450 area. USD/JPY gains remain modest (108.75 area).
Today, the calendar is moderately interesting with the EMU confidence data and the US NFIB small business confidence. The first US Treasury auction (3-y) is worth following too. The China-US trade talks and president Trump giving an address on the US government shut-down are wildcards for global (FX) trading. Of late, the risk rebound and Fed’s Powell indicating policy flexibility weighed on the dollar, even as US yields rebounded at the same time. For now, the rise in US yields apparently blocks further USD losses beyond first EUR/USD resistance. That said, recent USD performance suggests that underlying sentiment on the USD currency has weakened. Any progress in the US-China trade talks might be euro supportive too. Conflicting drivers are in play, but we have the impression that the downside in EUR/USD is rather will protected. So a retest of the 1.15 resistance might be on the cards. In case of a break, the 1.1621 mid-October top is the next reference.
Sterling trading was mostly driven by technical considerations after Friday’s rebound. EUR/GBP mostly hovered in the upper half of the 0.89 big figure. Today, the political debate on Brexit will restart. PM May is said to prepare contingency plans to prepare for a no-deal Brexit. We assume more technical trading in EUR/GBP as long as there is low visibility on what will happen after next week’s UK Brexit vote
EUR/USD: post-Powell USD correction slows. 1.15 resistance continues to play its role
