- Rates: Trade jitters ease, mitigating flight to safe havens.
The risk-off that dominated markets lately eased yesterday, putting a halt to the core bond rally for now. German Bunds outperformed as Italy suggested it might disobey EU fiscal rules. US eco data today include the April retail sales. German Q1 GDP printed in line with expectations. The risk relief might continue for no, though we err on the side of caution. - Currencies: EUR/USD rally slows as USD doesn’t lose interest rate support, for now
The dollar bottomed yesterday. Easing of global tensions halted investors’ quest for Fed easing further down the road, giving the dollar some relief. Eco might get some more weight in the intraday FX price action today. For now, we assume that the bottom in EUR/USD (topside of the dollar) is well protected unless Europe is more openly involved in the trade war.
The Sunrise Headlines
- US stock markets got some (temporary?) reprieve yesterday, recovering between 0.8% and 1.15% (Nasdaq). Asian bourses are positively oriented as well with China outperforming (>+1%) regardless of disappointing eco data.
- China’s economy lost steam at the start of Q2 despite this year’s fiscal and monetary stimulus . Industrial production (5.4% Y/Y), retail sales (7.2% Y/Y) and investments (6.1% Y/Y) all slowed and fell short of forecasts.
- US President Trump called on the Fed to match China’s easy monetary policy to help win the trade war. He later added that US growth would hit 5% “with a little quantitative easing.”
- UK PM May will try her luck a 4th time in parliament early June. She’ll table her Brexit deal again. Cross-party talks with opposition Labour haven’t yielded an agreement with Corbyn still calling on heavy concessions from conservatives.
- The Saudi energy minister announced that armed drones attacked an oil pipeline two days after the sabotage of oil tankers in the Street of Hormuz. Yemeni rebel Houthis, possibly backed by Iran, are under suspicion.
- US President Trump is rumoured to issue an executive order this afternoon that would forbid US businesses from using telecommunications equipment made by companies that pose a national security risk (Huawei…).
- Today’s economic calendar contains US retail sales, Empire Manufacturing business sentiment, industrial production, NAHB Housing index and the 2nd reading of EMU Q1 GDP. Fed Daly, Quarles, Barkin, ECB Coeuré and Praet speak.
Currencies: EUR/USD Rally Slows As USD Doesn’t Lose Interest Rate Support, For Now
EUR/USD rally blocked as trade tensions ease
Yesterday, the risk off on the US-China trade dispute eased. US yields didn’t decline further, giving the dollar some leeway. In the afternoon, US NFIB small business confidence printed better than expected. On the other hand, Italian PM Salvini advocated that the country might breach the EU budget rules to reduce unemployment, weighing on the euro. EUR/USD closed at 1.1204 (from 1.1222). USD/JPY also profited from the risk-on and finished at 109.66 (from 109.30). This morning, the news flow from Asia is mixed. China April production and retails sales missed the consensus by a big margin. However, any risk-off correction was blocked by the hope for additional stimulus. Even so, the yuan stabilizes against the dollar (USD/CNY 6.875). The slowdown in China weighs on the Aussie dollar (AUD/USD 0.6930 area). EUR/USD stabilizes just north of 1.12. USD/JPY gains a few ticks (109.65).
Later today, markets will look out for potential next developments in the USChina trade dispute. However, the eco calendar is also well filled with the German Q1 GDP growth (expected 0.4% Q/Q). EMU growth is expected to be confirmed at 0.4% Q/Q. Any downside surprise might weigh on the euro. In the US (core) retail sales growth is expected to slow (0.3% M/M) after a strong March reading. We have few reasons to expect a big downside surprise. Last week, the dollar underperformed the euro (and the yen) as markets see a rising chance for Fed cuts as tensions might undermine US growth. This USD decline slowed this week and some euro softness kicked in yesterday. We expect the speculation on Fed rate cuts to persist. This might cap a sustained USD rebound. In a day-to-day perspective, EUR/USD is losing momentum. The pair might cede some further ground in the 1.1110/1.1265 ST range. Still, we don’t expect a downside break. The trade war spreading to Europe (e.g. tariffs on autos) is a risk factor.
Yesterday EUR/GBP hovered in the upper half of the 0.86 big figure. UK labour data were ok, but had little impact on trading. UK PM May received permission from her (divided) party to continue talks with labour. This should lead to a new vote on withdrawal agreement in the week of June 03. For now, it doesn’t help sterling much. A test of the EUR/GBP 0.8722 MT range top might be in the cards.
EUR/USD: dollar decline slows as does the decline in US yields
