- Rates: Prefer to err on the side of caution
Risk sentiment remains extremely fragile. Main Asian indices overturn a late bearish rally on WS. US President Trump’s planned fiscal measures receive a lukewarm response in US Congress. Core bonds shrugged off part of overbought conditions in yesterday’s profit taking move, but regain momentum this morning. - Currencies: EUR/GBP rebounds north of 0.88 as BOE cuts policy rate
The dollar staged a (temporary) rebound as the markets pondered the efficacy of fiscal measures to be prepared by the US government. However, doubts return this morning with the US dollar returning part of yesterday’s gain. Today, the focus will remain on the fiscal stimulus. Sterling is drifting lower after an intermediate BoE interest rate cut.
The Sunrise Headlines
- Wall Street rallied with gains up to 4.95% (Nasdaq) at the end of a whiplash trading session. Asian markets are mostly in the red amid growing scepticism about Washington’s stimulus package. South Korea underperforms (-3.9%).
- US president Trump failed to announce his planned stimulus package – which could include a payroll tax cut and paid sick leave – as Democrats pushed back on the plan. Economic advisor Kudlow said talks with Congress will continue.
- Italian PM Conte is looking to increase Italy’s fiscal stimulus program for the fourth time in a month to as much as €16bn after the EU agreed to stretch the country’s budget rules to fight the coronavirus outbreak, Bloomberg reported.
- Australia is seen moving into a recession by June 2020, growing just 1.2% in 2020 before rebounding, according to S&P. Nevertheless, the country’s sound fiscal position has provided room to manoeuvre at the current AAA rating.
- Joe Biden romped to victory in another round of primaries. Biden triumphed in the key state of Michigan while also winning in Missouri, Mississippi and Idaho, widening his lead over Bernie Sanders in the Democratic nomination race.
- The BoE mimicked the Fed’s move and unanimously voted to slash its policy rate by 50 bps to 0.25% at a special meeting. The central bank also introduced a new Term Funding scheme with additional incentives for SMEs.
- Today’s economic calendar contains US CPI numbers and UK industrial production data. The UK government announces its budget: will it add firepower to combat the COVID-19 outbreak? Germany and Portugal tap the bond market
Currencies: EUR/GBP Rebounds North Of 0.88 As BOE Cuts Policy Rate
EUR/GBP jumps north of 0.88 on BOE rate cut
A countermove to the corona & oil risk-off trade kicked in yesterday. The trigger wasn’t that obvious, and it developed in an uneven way during the day and across markets. Several governments, including the US, preparing fiscal measures maybe gave investors temporary comfort. Equities, core yields and the dollar staged a comeback with the move accelerating during the US trading session. The trade-weighted dollar (DXY) rallied from the mid 95 to the mid 96 area. USD/JPY came within reach of the 106 big figure and closed at 105.64. EUR/USD finished the day at 1.1281, near the intraday low.
This morning, the glass is again rather half empty than half full. Markets apparently grow more uncertain on the timing, the content and the efficacity of the (US) fiscal measures. Equities in Australia and South Korea are losing up to 3.0%. Losses in other regional markets are smaller. A new slide in US yields blocked the USD-rebound. USD/JPY slipped back to the 104.50 area. EUR/USD has currently returned to the 1.1350 area. The yuan shows no clear trend (USD/CNY 6.9475 area).
Later today, the US CPI data will be published. However, data are no big issue for FX markets. If anything, timely activity data might get some attention, probably not price data. The focus turns to the fiscal response to the corona crisis (inside and outside the US). Several governments announced or are preparing measures. However, we doubt that the amounts and the nature of the measures will be sufficient to boost confidence in a sustained way. If this leads to a new wave in the risk-off trade, the dollar might face more headwinds than the euro, even as the EU fiscal response is limited, too. Yesterday, we assumed the dollar to be captured in a sell-on upticks pattern. We hold on to that view. 1.1250/1.1620 might be a new trading range, with intermediate resistance at 1.15. We don’t anticipate a sustained USD rebound yet.
Yesterday, EUR/GBP showed some nervous intraday swings. At the end of the day, sterling traded at the weakest level against the euro since October. The risk rebound didn’t help sterling much. At the time of writing, the BOE cuts its policy rate by 50 bp.to 0.25%. EUR/GBP rallies north of 0.88. Later, the focus turns to the UK Budget. Question is whether enough spending will be directed to the short-term-term impact of corona, rather than to LT topics (infrastructure etc). If not, sterling might stay in the defensive.
EUR/USD holding well north of 1.1250 reference even as dollar rebounds
