- Rates: Fed to remain accommodative for a long time
The underlying tone of Fed Chair Powell’s press conference should be clear: policy will remain accommodative for a long time with growth crashing and inflation (expectations) sliding. The implication is low yields for longer. In coming weeks/months, the Fed will finetune its forward guidance, possibly tying it to hard economic or yield targets. - Currencies: EUR/USD stays off recent lows, but rebound remains unconvincing
Yesterday, EUR/USD failed to keep gains due to an overall softer dollar. Fitch cutting Italy’s credit rating didn’t help. This morning, market sentiment remains constructive. The dollar declines slightly. The Fed probably won’t hinder a positive market sentiment. Question is whether/how much EUR/USD will be able to profit. 1.09 proved to be rather tough of late.
The Sunrise Headlines
- WS lost ground during a choppy session as investors weighed mixed corporate earnings and fled tech stocks. The Nasdaq underperformed (-1.40%). Asian markets nudge higher with Taiwan (+1.44%) leading gains. Japan is closed.
- Fitch slashed Italy’s credit rating to BBB-, a single notch above junk, citing the detrimental impact of the coronacrisis on the country’s debt sustainability. Fitch raised Italy’s outlook to stable from negative on the back of the ECB’s PEPP.
- US president Trump touted the Payment Protection Plan that has already approved $52bn in loans in roughly a day and said he “liked the idea” of payroll tax cuts in forthcoming stimulus packages.
- White House senior economic advisor Kevin Hasset warned for “very grave shock” to the US economy this quarter, cautioning unemployment could reach 16-20% and GDP could fall as much as 30-40% on an annualized basis.
- Trump issued an executive order, requiring meat-processing plants to continue operating, declaring them critical infrastructure amid mounting concerns about food-supply shortages.
- According to the British Chambers of Commerce (BCC), already 3/4th of the UK’s small businesses have temporarily laid off their staff under the government’s wage-guarantee scheme that covers 80% of workers’ salaries.
- Today’s economic calendar contains Q1 GDP prints in the US & Belgium and the economic confidence indicator in the EMU. All eyes are on the Fed: will Powell provide more clarity & guidance? Germany, Italy & the UK tap the bond market
Currencies: EUR/USD Stays Off Recent Lows, But Rebound Remains Unconvincing
EUR/USD pattern remains unconvincing
An ongoing positive sentiment first caused a further USD decline yesterday. Markets reacted positively to signs of a gradual reopen of the economy in parts of the US and Europe and mostly focused on positive corporate earnings stories. The TW dollar (DXY) extended its decline below 100. EUR/USD jumped temporarily higher in the 1.08 big figure, but reversed course as sentiment dwindled later. A protracted slide in EUR/JPY beyond the 116 area probably weighed on EUR/USD too. Fitch cutting the Italian credit rate to BBB- also didn’t help. The pair closed even marginally lower at 1.0820. USD/JPY closed at 106.87.
This morning, sentiment again changed for the better amongst others supported by a better than expected results from Alphabet. The dollar trades with a tentative negative bias. Japanese markets are closed but USD/JPY extends its decline (106.55). EUR/USD also regains modest ground despite the downgrade of Italy. AUD/USD continues is uptrend and is trading well north of 0.65.
Today’s first estimate of the US Q1 GDP probably will paint a diffuse picture on the first impact of corona. The focus of global (FX) markets will be on the Fed and on corporate earnings. Fed Chair Powell will face question on next steps (forward guidance, amounts APP, yield curve control…), but for now we expect the Fed to keep its ‘unconditional ‘ commitment. The Fed probably won’t obstruct a positive market sentiment. Unless corporate earnings would bring high profile negative surprises, we see today’s set-up as (mildly) USD negative. Question remains to what extent the euro (EUR/USD) will be able to profit. The spread narrowing on EMU bond markets might slow after the Italian downgrade. Also keep an eye at EUR/JPY. Earlier this week, EUR/USD dropped briefly below 1.0770, but the downside test was rejected. The overall level of uncertainty probably remains too high for investors to already aggressively reduce USD buffers. EUR/USD consolidation in the 1.0730/1.10 range might be on the cards. Over the previous days the 1.09 area already proved to be quite though resistance.
Sterling traded with a tentative positive bias against the euro and the dollar mainly due to a constructive risk sentiment. CBI retail data showed a very steep setback. The ongoing risk rebound continues to support sterling this morning. EUR/GBP is testing the 0.8682/0.87 support. A break would be technically relevant, but for now we stay cautions on a big leap higher of sterling.
EUR/USD: downside test rejected but no convincing upside momentum yet.
