- Rates: Core bonds remain resilient
US President Trump criticized Germany over support for Nord Stream 2. His comments sank oil prices. Investors aren’t willing to bet against a dovish Fed next week. The US yield curve remains in bull steepening mode. Risk sentiment shows more signs of fatigue. The eco calendar only contains second tier eco data. - Currencies: USD decline halts, but sustained gain difficult ahead of the Fed meeting.
EUR/USD again failed to clear the 1.1340/50 resistance yesterday even as US CPI was soft and US yields declined. The eco calendar is thin today. USD trading might be technical in nature. Sustained USD gains are not evident ahead of next week’s Fed meeting as markets expect Powell and Co to take a dovish turn.
The Sunrise Headlines
- US stock markets marginally dropped yesterday as growth worries linger. The Nasdaq (-0.38%) underperformed. Asian equities slip during a risk-off trade session. Japan (-1%) underperforms its peers.
- In Australia’s May job report net job growth (42.3k) and the participation rate (66.0%) topped estimates. An unexpected stabilization of the unemployment rate (5.2%) however casted a shadow over the report. AUD/USD (0.69) lost ground.
- The UK holds a first leadership ballot today, which will at least eliminate one of the 10 candidates to follow up on Theresa May. An outcome is expected by noon. The others face more ballots next week (June 18,19 and 20).
- Brent crude oil prices briefly dipped below $60/b. yesterday after US oil stocks showed an unexpected 2.2m barrel increase, raising fears for a supply glut. Oil prices have dropped more than 20% from its correction top in May.
- The Nord Stream 2 gas pipeline between Germany and Russia triggered frustrations with Trump. The US president is considering sanctions to block the project that would increase gas flows from Russia to Europe.
- Rating agency Fitch said Italy’s fiscal outlook would weaken if the new dispute with the EC escalates, adding that the re-emergence of the mini-BOTs “risks an adverse market reaction”. A sovereign update is due in August.
- Today’s economic calendar contains the weekly US jobless claims. Industrial production figures are due in Europe. EMU finance ministers meet to discuss member states’ budgets and Italy. The latter and the US are to sell bonds
Currencies: USD Decline Halts, But Sustained Gain Difficult Ahead Of The Fed Meeting
USD stabilizes, but sustained gains remain difficult
Dollar shorts were forced to take a step backward yesterday. A modest risk-off pushed US yields lower and narrowed the US-German spread further. US CPI was also softer than expected, reinforcing market hopes on a Fed rate cut. However, two attempts of EUR/USD to break above the 1. 1340/50 resistance failed, triggering a technical setback. Later, a sharp decline of the oil price and president Trump considering sanctions related to the Nord stream 2 gas pipeline were a dollar positive/euro negative too. EUR/USD closed the day at 1.1287. The impact on USD/JPY was modest. The pair closed little changed at 108.50
This morning, sentiment on risk remains fragile. The dollar is slightly losing ground. EUR/USD returns close to the 1.13 level. USD/JPY trades in the 108.30 area. The Australian dollar is declining further. Australian job growth was strong, but a small miss in the unemployment rate (5.2%) kept the hope alive for further RBA easing. Australian yields continue to set record low levels. AUD/USD is drifting to the low 0.69s.
Today’s eco data (EMU production, US import prices and jobless claims) are probably only of intraday significance for FX trading. The euro area finance ministers meet to discuss disciplinary action on Italy (budget). Yesterday, the dollar was in slightly better shape. Even so, we see little upside for the dollar ahead of week’s Fed meeting. Comments from US politicians on the Fed (Wilbur Ross) and on a too strong dollar might cap USD gains too.
At the end of last week, US yields touched new cycle lows, pushing EUR/USD temporarily above the 1.1324 resistance. US yields bottomed this week as substantial Fed easing was discounted, removing some pressure from the dollar. Still, the USD rebound was unimpressive. Longer term, the dollar might have entered a sell-on-upticks pattern. The 1.1200/1.1250 looks solid EUR/USD support. Further sustained gains beyond 1.1324/48 still open the way to the 1.1448 target area.
On Tuesday sterling rebounded on solid UK labour data. Yesterday, sterling initially gained further after Boris Johnson said he didn’t aim for a no deal Brexit. However, this ‘political’ rebound had no strong legs. EUR/GBP closed near 0.89. We expect more technical trading as the contest for the leadership of the conservative party continues. Still we have the impression that extreme negative news will be needed to push EUR/GBP beyond 0.90/0.91 tough resistance.
EUR/USD: Dollar decline halted, for now, but sustained gains probably remain difficult
