- Rates: Easy part of risk rebound over?
FOMC Minutes and speeches by more Fed governors cement the US central bank’s new narrative of “patience” in the tightening cycle. This message should be by and large discounted. The easy part of the risk rebound seems to be over. Core bonds might stabilize or even gain some ground. The US’s 30-yr bond auction is a wildcard. - Currencies: Dollar decline accelerates. EUR/USD clears 1.15 resistance.
The USD lost further ground as Fed governors and the Minutes of the December Fed meeting indicated that the US currency won’t get additional interest rate support anytime soon. EUR/USD cleared a first technical barrier illustrating a change in investors’ assessment on the dollar. Sterling also ceded ground as the government is losing grip on the Brexit process
The Sunrise Headlines
- US equity markets gained ground yesterday for a fourth consecutive day as risk sentiment remained positive. Technology shares outperformed. Asian equities are trading mixed with Japanese indices underperforming.
- The Bank of Canada kept its policy rate unchanged at 1.75%. They added “over time” in their forward guidance that policy rates will need to rise to neutral, but overall didn’t really sound too worried about the outlook
- US President Trump walked out of a meeting with Democrats, calling it “a total waste of time”, as Democrats still won’t agree to include wall funding in the budget. The US government remains (partially) shut, already lasting 19 days.
- The minutes of the Fed December meeting showed that more and more governors think that the bank can afford to be patient about further policy tightening, a message confirmed yesterday by different governors.
- Saudi Arabia’s energy minister Khalid al Falih vowed to further stabilize the oil market as oil prices are cautiously rebounding after dropping by more than 40% in the fourth quarter last year. Brent crude oil rose back above $60/barrel.
- Chinese inflation dipped more than expected in December. CPI rose by 1.9% Y/Y down from 2.2% and PPI by 0.9% Y/Y, down from 2.7%. Softening demand and lower commodity prices are to blame.
- Today’s economic calendar contains weekly jobless claims, ECB Minutes and speeches by several Fed governors including chair Powell. France and the US tap the bond market
Currencies: Dollar Decline Accelerates. EUR/USD Clears 1.15 Resistance.
EUR/USD finally clears the 1.15 resistance
The dollar initially drifted sideways on Wednesday as there were few data in EMU and the US. Later in US dealings, the dollar started a new down-leg. Several Fed governors and the Minutes of the Fed December meeting indicated the Fed was likely to pause/slow normalization as it tries to assess the consequences of recent market volatility. Ongoing soft inflation gives the Fed additional room to manoeuvre. EUR/USD jumped above the 1.15 resistance that capped EUR/USD since early November. The pair closed at 1.1543 (from 1.1441) USD/JPY also drifted south even as risk sentiment remained fairly constructive. The pair finished the day at 108.17 (from 108.75). This morning, the risk rally is taking a breather as markets look for more details/results from the US-China trade talks. The impasse of the US government shutdown and an ever more chaotic Brexit process might be (minor) sources of investor caution. Asian equities show a mixed picture. Japan underperforms on a strong yen. USD/JPY dropped below 108. The yuan also accelerates (USD/CNY 6.79 area). EUR/USD (1.1555 area) continues trading with an upward bias. Later today, the eco calendar is again thin. Several Fed governors, including voters Clarida, Evans, Bullard and Fed Chairman Powell are scheduled to speak. They are expected to confirm that the Fed is shifting to a more cautious approach. The impact on markets/the dollar might become less as most of them already gave their view of late. Since end last week, the dollar already lost momentum and the decline accelerated yesterday, with EUR/USD clearing a first technical barrier. We had a cautious bias on the US dollar as it became clear that the US currency will get little interest rate support in the foreseeable future. The USD decline might slow if the risk rally were to lose momentum. Even so, we see no reason to row against the USD negative momentum. EUR/USD 1.1621 (mid-Oct top) is next reference.
Yesterday, UK PM May suffered another defeat in Parliament as the lower House is taking up an ever more important role in the Brexit process. The government losing its grip is an additional factor of uncertainty weighing on sterling. EUR/GBP rebounded north of 0.90. At some point, this process might lead to a Brexit delay or another scenario that might be considered more favourable for sterling. However, short term, visibility on the next Brexit steps is becoming even mistier. This might continue to weigh on sterling. EUR/GBP 0.91 is the next technical reference.
EUR/USD clears 1.15 resistance as Fed signals a slowdown in policy normalisation.
