- Rates: US issues warning on trade
Core bonds treaded water with volumes extremely thin. US Trade Representative Lighthizer issued a warning towards the EU on trade. China did the same earlier this week. A new event risk for 2020? Stock markets show signs of fatigue while core bonds find some support. - Currencies: Sterling reverses post-election gains. EUR/USD running into resistance?
EUR/USD moved up and down in the 1.11 figure yesterday. However, potential EU-US trade tensions, the risk of a new Brexit cliff-hedge and solid US eco data capped the EUR/USD upside. A retest/break of EUR/USD 1.12 looks less evident even in case of a strong IFO today. Recent sterling strength evaporated as a no-deal Brexit is again on the radar
The Sunrise Headlines
- Wall Street ended a choppy trading session virtually flat even as US data surprised on the upside. Asian markets are trading mixed, lacking overnight guidance. Japan underperforms (-0.55%).
- US trade representative Lighthizer said US president Trump is ‘focused’ on ‘very unbalanced’ trade with the EU. His comments suggest that after Canada, Mexico and China, the EU is getting in the US crosshairs.
- Rating agency Fitch upgraded UK’s outlook from negative to stable, citing the diminished risk of a no-deal Brexit following the Tory victory. Fitch took the UK off ‘rating watch negative’ for similar reasons but kept its negative outlook.
- The US government is planning to toughen up sanctions on Iran after already driving its oil exports to historic lows by increasing pressure on shadowy global shipment which is often used to evade current sanctions.
- Head of the Italian central bank Visco said the ECB should find a better way to handle disagreement in its ranks as part of the strategic review. He suggested the ECB should publish the results of regularly held votes on monetary policy
- A congressional panel approved a six-hour debate yesterday to take place in the House of representatives today. The debate is followed by a final vote on charges of abuse of power and obstruction of Congress by US president Trump.
- Today’s economic calendar contains (final) inflation data for the EMU and UK. The Ifo-indicator is due in Germany. ECB president Lagarde and Fed’s Brainard are scheduled to speak.
Currencies: Sterling Reverses Post-Election Gains. EUR/USD Running Into Resistance?
Sterling reverses post-election gain
EUR/USD and USD/JPY hovered in well-known territory yesterday. Even so, it was becoming clear that (political) event risk might still resurface even after the UK election and US-China trade tensions eased. After a soft start, EUR/USD rallied to the 1.1175 area, but good US housing and production data and hawkish comments on the EU-US trade from US Trade representative Lighthizer triggered a reversal. The slide in cable weighed on EUR/USD, too. The pair closed marginally higher at 1.1150. Nearby resistance and a more cautious risk sentiment blocked further USD/JPY gains too. The pair closed at 109.50 (from 109.55).
Asian equities struggle to prevent losses. Japan underperforms. Japanese trade data (exports and even more imports) were weak and suggest little impact from an improvement in the global economy. USD/JPY is losing some further ground (109.45 area). USD/CNY trades again north of 7.00 (7.005). EUR/USD is also trading with a negative bias. Resurfacing Brexit uncertainty and lingering uncertainty on (global/EU-US) might be a source of euro softness. There are no US data. German Ifo Business climate is seen continuing a gradual recovery from 95.0 to 95.5. Given disappointing EMU/German (manufacturing) PMI’s of late, a substantial beat is probably needed to inspire a meaningful EUR/USD rebound. Renewed uncertainty on a new Brexit cliff-edge might also cap euro gains.
EUR/USD settled in the higher part of the 1.10/1.12 range. The Fed has put the bar for rate hikes very high, limiting USD interest rate support. The impact of the risk rally on FX is modest, but the euro showed some resilience. Still, the ‘return of Brexit’ might make a break beyond 1.12 less evident. Further EUR/USD gains probably also need more convincing EMU data. In daily perspective, we turn more neutral on EUR/USD.
Sterling reversed gains recorded after the Troy victory yesterday. Plans of PM Johnson to legally block an extension of the transition period beyond Dec 2020, spooked sterling traders. EUR/GBP jumped back to the 0.85 area. Decent UK labour data and rating agencies S&P and Fitch improving their credit assessment on the UK don’t help sterling. Today’s, the UK price data will be published, but the focus for sterling trading remains on ‘new’ Brexit debate. EUR/GBP might look for a new ST equilibrium near current levels after recent swings.
EUR/USD rebound slows as ‘event risk’ resurfaces
