- Rates: Investors hold their breath for more earnings and Fed
Global core bonds ended mixed yesterday with US Treasuries outperforming German Bunds. An empty eco calendar left investors unguided but the bund proved resilient. US-Sino trade talks, more earnings (Facebook, Boeing,…) and the run-up to the Fed policy meeting are determinative for today’s sentiment. - Currencies: Sterling tumbles as UK Parliament votes to renegotiate Irish Backstop
Yesterday, the dollar showed no clear trend as markets await the Fed policy decision. The Fed Chair giving more weight to policy flexibility might still be a modest USD negative. EMU eco data and headlines on the US-China trade talks are a wildcard for EUR/USD trading. Sterling traders are again facing a period of uncertainty after yesterday’s UK voting in Brexit
The Sunrise Headlines
- US markets closed mixed yesterday. The Dow Jones managed to eke out gains (+0.21%) but the S&P (-0.15%) and Nasdaq (-0.81%) ended in red. Most Asian equities are under slight pressure. Japan underperforms (-0.4%).
- The British Parliament rejected the Cooper-Boles amendment – that seeks a delay of Brexit – but approved the Brady proposal. Brady’s plan is to renegotiate the Irish backstop, which already has been rebuffed by the EU.
- Australian Q4 inflation (0.5% QoQ, 1.8% YoY) was marginally higher than expected (0.4% QoQ, 1.7% YoY). Markets braced for a negative surprise after a recent batch of weak(er) data. The Aussie dollar jumped.
- League members put pressure on Italy’s Deputy PM Salvini to force a snap election to cash the party’s growing lead and to ditch the coalition partner 5SM, which they say hamper League’s efforts to deliver on election promises.
- French BBP grew 0.3% QoQ (0.9% YoY) in the last quarter of 2018, as expected. Growth was mainly driven by the public sector, capex and exports while household consumption stagnated.
- The race to succeed the ECB’s chief economist Peter Praet concludes today. Ireland’s central bank governor Philip Lane is, so far, the sole candidate. Lane holds a similar view on the economy as Draghi.
- Today’s economic calendar contains January ADP employment change, the first 2019 Fed meeting and high level trade talks in the US. The EC’s economic confidence is due in the EMU and Germany releases January inflation data. Tech giants Microsoft and Facebook publish Q4 results
Currencies: Sterling Tumbles As UK Parliament Votes To Renegotiate Irish Backstop
Sterling hammered after UK Brexit voting
FX traders were in wait-and-see modus yesterday, ahead of today’s FOMC meeting and the restart of the China-US trade talks. There were again few eco data. US consumer confidence was weak, but had little impact. Interest rates differentials between the USD and the likes of the euro and the yen narrowed further but had also little impact. EUR/USD finished at 1.1433 (from 1.1428). USD/JPY ended 109.40 (from 109.35).
Asian equities are trading mixed this morning, with Japan and China slightly underperforming. The yuan (USD/CNY 6.7150 area) extends gains despite a cautious risk sentiment. USD/JPY (109.30 area) is trading with a tentative negative bias. EUR/USD (1.1445) is gaining a few ticks. Australian Q4 inflation remained soft as expected but, contrary to some other recent data evidence, it brought no negative surprise (headline at 1.8% Y/Y)/ AUD/USD rebounded to the high 0.71 area. In EMU, French Q4 GDP printed soft (0.3% Q/Q), but marginally stronger than expected, slightly supporting EUR/USD. EC confidence is expected to ease further and this is also the case for the German CPI (headline expected 1.6%). The US GDP release is delayed. ADP job growth is expected to return to a more trend-like growth (185k) after last month’s very strong figure. Any FX reaction will probably be muted, ahead of the FOMC decision. The Fed chair is expected to confirm policy flexibility. Markets will look whether the Fed holds its view on gradual rate hikes and to what extent policy flexibility also applies to the shrinking of the balance sheet. Over the previous days, the dollar lost interest rate support, suggesting that markets are positioned for a rather soft Fed. EUR/USD drifted higher in the 1.12/1.15 ST range after a ST downtrend ended on Friday. EUR/USD remains well bid, but the Fed probably needs to stress flexibility (also on the balance sheet) to push the dollar below (EUR/USD above) technically significant levels. Intermediate resistance comes in in the 1.15 area ahead of the 1.1570/1.1621 range top.
Yesterday evening, sterling was sold after the UK Parliament approved an amendment, instructing UK PM May to remove/renegotiate arrangement on the Irish backstop in the EU-UK Brexit deal. EUR/GBP is again trading north of the 0.87 big figure. First comments from Europe suggested that the room of manoeuvre is close-to-non-existent. In this context, sterling is probably again becoming more vulnerable if some kind of ‘last minute’ arrangement is still possible. ST-term, we see more downside that upside sterling for sterling in this binary Brexit proces.
EUR/USD: USD trading slightly in the defensive ahead of Fed policy decision
