- Rates: Core bonds prone for additional profit taking
Friday’s profit taking move on core bond markets can continue early this week with momentum building into Friday’s Trump/Xi Jinping meeting and key technical levels (US/German 10y yield) holding. The US’s end of month supply operation and German Ifo business sentiment could further do the trick. - Currencies: EUR/USD extends gain beyond 1.1350, improving the technical picture
On Friday, a better than expected EMU PMI helped EUR/USD to regain the 1.1350 resistance. Today, euro traders look out whether German Ifo business climate confirms last week’s PMI’s. At the same time, underlying USD softness persists. The technical picture of EUR/USD improves further. 1.1450 is next reference on the technical charts
The Sunrise Headlines
- A choppy Wall Street trading session ended in red as markets pondered geopolitical and trade risks last Friday. The Nasdaq underperformed (-0.24%). Asian stocks are trading mixed with Japan outperforming (+0.2%).
- President Erdogan’s AKP lost the mayoral election redo in Istanbul last Sunday. Imamoglu, who narrowly won the initial election, further increased its majority, having about 54% of the votes. The Turkish lira advances about 1%.
- After calling off Iranian air strikes after it lost a drone, the US will impose new yet unspecified sanctions on the country today. President Trump added however he is still willing to negotiate without preconditions.
- Two EU officials said the European Commission will not (yet) formally start the excessive deficit procedure against Italy when it meets tomorrow. By pausing the procedure, parties buy time to a compromise and hope to avoid escalation.
- RBA governor Lowe warned that monetary policy easing is unlikely to be as effective as in the past. He urged governments to have a number of “shovel ready” infrastructure projects ready in case of an economic slowdown.
- An estimated 250 000 demonstrators gathered in Prague yesterday to demand PM Babis’ resignation. Babis allegedly used European Union subsidies for building a hotel but denies any wrongdoing.
- Today’s economic calendar eyes rather empty. The IFO index is scheduled for release in Germany. US VP Pence postponed his China speech due to “progress in conversations between Trump and Xi”.
Currencies: EUR/USD Extends Gain Beyond 1.1350, Improving The Technical Picture
EUR/USD regained 1.1350 resistance
The euro took a weak start on Friday, but any downside drift was soon blocked by better than expected EMU PMI’s. The eco picture remains fragile but that was already discounted in EMU (interest) rate markets. European yields rebounded a few bp, further protecting the the downside of the euro. At the same time, US data and Fed comments confirmed a soft Fed approach. The intraday EUR/USD rise accelerated later in US dealings as the pair reached the 1.1340/50 resistance area. EUR/USD closed the session at 1.1369. The USD/JPY decline from earlier last week slowed. The pair closed the session little changed at 107.32
Asian stocks are trading mixed with geopolitical topics dominating the headlines. Tensions between the US and Iran remain elevated. At the same time, US and China officials are preparing the meeting between president Trump and Chinese president Xi at the end of this week. A rise in US equity futures suggests that markets take a cautiously constructive view. EUR/USD (1.1375 area) is holding near recent top. USD/JPY hovers in the mid 107 area. The Aussie dollar rebounded after RBA’s Lowe indicated that there are limits to what (global) monetary easing can do to stimulate growth. AUD/USD is trading north of 0.6950.
Today, the eco calendar is moderately interesting with the Chicago Fed national activity index, the Dallas Fed manufacturing index and German Ifo business climate. The German Ifo is expected to ease slightly further. Markets will look out whether the Ifo can copy Friday’s upside surprise of the EMU PMI. The euro already succeded quite a strong performance of late. However, especially the trend toward a weaker dollar looks well established. In this respect, we also look out for comments on FX from US officials in the run-up to this week’s G20 meeting. EUR/USD breaking above the 1.1350 area improved the technical picture in this cross rate. Next resistance is seen in the 1.1450 area.
Sterling remained in the defensive last Friday as both contenders in the race to the conservative leadership are stepping up their campaign rhetoric. There are no important eco data in the UK today. Polls suggest that Boris Johnson is losing quite some of its advantage over Jeremy Hunt. However, for now, this doesn’t help sterling much. Visibility on the next steps in the leadership’s race and in Brexit remains low. We expect EUR/GBP to hold rather strong. Overall euro strength might also protect the downside of EUR/GBP.
EUR/USD breaking north of 1.1350, improving the ST technical picture
