- Rates: First upward surprise from EMU PMI’s in a long time?
We expect October PMI’s to beat consensus following dismal September readings and given lower geopolitical event risk. It could be interpreted as an early bottoming out signal and extend the recent bear steepening of EMU yield curves. ECB President Draghi’s final meeting probably won’t have any market impact following decisions taken in September. - Currencies: Will EMU data finally provide some support for the euro?
The euro and sterling took a breather yesterday as the Brexit process stalled again, but both currencies preserved most of their recent gains. Today, the focus turns to the eco data and the ECB. Signs of bottoming in the EMU PMI’s might support the euro and further improve the technical picture in EUR/USD
The Sunrise Headlines
- WS edged higher (up to 0.28%) as upbeat earnings reports and favourable geopolitical developments swayed sentiment. Asian markets are trading mixed amid gloomy eco data, with Singapore outperforming.
- The Fed said on Wednesday it would increase the sizes of its overnight and term repo operations, seeking to avoid a cash crunch in the funding markets at the end of the month, with signs of potential volatility already emerging.
- Brexit entered a holding pattern as EU members states delayed a decision on whether and how long to grant the UK a third extension while PM Johnson said that, if forced a lengthy extension, he would call an early election.
- US president Trump announced a lifting of recently imposed sanctions against Turkey as Turkey agreed to end its offensive against the Syrian Kurdish YPG militia in northeast Syria.
- Japan’s manufacturing flash PMI shrank at its fastest pace in more than 3 years in October, to 48.5. This adds to concerns over broadening economic cracks amid slowing global demand, trade frictions and a consumption tax hike.
- South Korea’s economic growth slowed more than expected (0.4% vs 0.5%) in Q3, despite a boost from government spending. Exports continue to face headwinds from a global economic slowdown which is weighing on investments.
- Today’s economic calendar leaves investors on the edge of their seats. 5 central banks will issue their policy decisions including Draghi’s final act. EMU PMIs will be published as will US durable goods orders
Currencies: Will EMU Data Finally Provide Some Support For The Euro?
Will euro finally get some support from the data?
Global (FX) markets started the day on a cautious footing yesterday as they pondered the impact of another delay in Brexit. EUR/USD drifted to the low 1.11 area. However, global sentiment gradually improved in US trading, mainly supported by an earnings inspired rebound in equities. Yields, EUR/USD and USD/JPY turned north again. There were hardly any data with market moving potential. EUR/USD finished marginally higher at 1.1130. USD/JPY remains well bid and finished at 108.69.
Asian equities mostly show modest gains in line with WS. China and Korea underperform. South Korean Q3 growth printed slightly lower than expected at 0.4% Q/Q. EUR/USD (1.1135 area) gains marginally. The upside in USD/JPY (near 108.60) is blocked as the 109.00 resistance area is within reach. The yuan strengthens slightly (7.0675 area).
Today, FX traders will keep a close eye on the EMU PMI’s, Draghi’s ECB press conference and the US data (durable goods orders, claims, Markit PMI’s). Markets expect PMI’s to start a bottoming process after a protracted slide. We join this view and even hope for a modest positive surprise. If so, it might support European yields and the euro. At the ECB press conference, we look out for questions on last month’s divided decision and on the ECB’s assessment of recent rise in (ST) yields. US durable orders (expected -0.7% M/M) are a wildcard.
The EUR/USD picture turned more constructive as the pair settled above 1.10 but follow-through gains were modest. Brexit uncertainty hasn’t been removed (yet?). At the same time, the dollar probably won’t make much headway ahead of the Oct 30 Fed meeting. EUR/USD 1.1250 is next reference on the technical charts. A break isn’t evident unless some high-profile euro positive news kicks in (Brexit, better PMI’s…)
Sterling initially lost some further ground yesterday as Tuesday’s votes in the UK parliament made it unlikely for the government to finalize a Brexit solution before the October 31 deadline. EUR/GBP filled offers in the 0.8660 area. However, in a broader perspective, sterling losses remained modest. Investors feel comfortable with the idea that disorderly Brexit has become unlikely. The focus now turns to the length of the Brexit delay the EU will give and whether PM Johnson will go for new elections. For now, sterling looks quite resilient. We expect more wait-and-see trading in EUR/GBP near current levels. The test of the 0.8675 support is rejected, at least for now
EUR/USD: Will PMI’s support a further improvement in the technical picture of the euro?
