- Rates: US supply and Caterpillar earnings to guide trading today?
Heavy US supply and the Budget office’s budget and economic outlook could cause underperformance of US Treasuries vs German Bunds today. The eco calendar is empty, but Q4 earnings from industrial bellwether Caterpillar could impact risks sentiment. Wednesday’s Fed meeting and US-Sino trade talks are this week’s key talking points. - Currencies: Dollar to stay in the defensive going into Fed meeting.
The EUR/USD decline halted on Friday even as EMU data remained weak. Dollar softness prevails as markets look forward to the Fed communication on the pace of policy normalization. Last week’s impressive sterling rally slows as markets look forward to a series of key votes in the UK Parliament that might determine the next steps in the Brexit process.
The Sunrise Headlines
- US stock indices closed Friday’s trading session in the green with technology shares outperforming (Nasdaq +1.29%). Asian equities opened mixed this morning with Japanese indices suffering from a stronger yen.
- US President Trump agreed on Friday to re-open the government for 3 weeks in exchange for negotiations on border security but remains pessimistic on a positive result. He again threatened to use emergency powers to build his wall.
- Chinese Vice ministers arrive in Washington today to prepare for high-level trade talks on Wednesday between Vice Premier Liu He and US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.
- Venezuelan president Maduro showed the military force in his country is still on his side as he tries to ward off the leadership contest by National Assembly leader Juan Guaido, who’s backed by many other countries (US, Canada,…).
- UK PM May faces a series of votes in Parliament this week. One could force her to delay the exit date to stop the UK from leaving with no deal. Another one could force her to go back to Brussels to negotiate changes to the Irish backstop.
- Japan’s Services producer prices rose 1.1% (Y/Y) in December, down from 1.2% a month before and lower than the 1.2% consensus forecast. China’s industrial profits declined 1.9% (Y/Y) in December, following-1.8% Y/Y in November.
- Today’s economic calendar is empty. The US Treasury holds a 2- and 5-yr note auction and the CBO releases its annual outlook. ECB president Draghi and BoE’s Carney speak. Caterpillar publishes Q4 earnings.
Currencies: Dollar To Stay In The Defensive Going Into Fed Meeting
Dollar caution to prevail ahead of Fed meeting?
Most of last week’s EUR/USD slide was reversed on Friday. German IFO business climate was weak in line with recent EMU data, but the euro didn’t decline further. EUR/USD even profited from a continuation of the global risk rebound. US Congress and president Trump reaching a cease-fire on the government shutdown didn’t help the dollar. Rumours that the Fed is considering to amend the roll-off of its balance sheet was a possible USD negative, too. EUR/USD finished at 1.1406 (from 1.1304). USD/JPY struggled and closed the day slightly softer at 109.55 (from 109.64), despite the equity rally. This morning in Asia, the risk rebound is taking a breather. Investors are looking forward to next steps in the US-China trade talks, the Fed policy decision and plenty of corporate earnings. The (trade weighted) dollar is stabilizing (95.75 area). EUR/USD is currently holding just north of 1.14. USD/JPY (109.30 area) is losing some ground in line with global equity sentiment. Today, EMU and US eco data will only be of second tier importance. ECB’s Draghi will speak before the EU Parliament. We also keep an eye at the Congressional Budget Office’s annual budget and economic outlook and at the auction of 2 and 5y Treasuries. A higher funding need in theory might put upward pressure on US yields, but we don’t expect it to be USD supportive. USD traders probably will mainly look forward to the Fed policy decision/press conference (Wednesday). The dollar might trade cautiously as markets are pondering the Fed communication on a (further) slowdown in the pace of policy normalisation. EUR/USD is still holding in the 1.12/1.15 trading range. Last week’s drift lower was halted on Friday. The EUR/USD downside looks again better protected. We assume the pair to remain rather well bid going into the Fed meeting. Positive headlines on the US-China trade talks (if they were to occur) might be at least as supportive for the euro as for the dollar.
The impressive GBP-rally slowed on Friday. EUR/GBP hovered in the 0.86 area, but in the end sterling maintained its weekly gain. This week, the UK Parliament will vote on several amendments that might determine the Brexit process going forward. Sterling might hold recent gains as long as markets are convinced that a no deal Brexit can be avoided and/or that the March 29 Brexit deadline might be delayed. We start the week with a neutral bias on EUR/GBP. The pair tested the 0.8620 support area. For now, we stay cautious on sterling as the visibility on the outcome of the political process remains low.
EUR/USD rebounds as test of intermediate support was rejected
