- Rates: Powell repeats dire eco outlook
Core bonds eventually returned gains built out after dismal US eco data as (US) stock markets immediately squared opening losses and with oil prices rallying. Fed Chair Powell repeated his dire eco outlook this weekend, but markets aren’t really going anywhere this morning. This week’s eco calendar is backloaded with EMU PMI’s due on Friday. - Currencies: EUR/GBP extends gains after breaking out of sideways range
The dollar dropped temporarily after a sharp decline in April US retail sales, but the major USD cross rates stay with tight established ranges. Sterling came under further selling pressure as EU-UK Brexit talks show a complete impasse. EUR/GBP rallied further as the pair broke through 0.8860/75 ST range top.
The Sunrise Headlines
- Wall Street erased early losses on Friday to eke out small gains eventually. The Nasdaq (+0.78%) outperformed. Barring India, Asian-Pacific markets rise similarly, with Australia (> +1%) outperforming.
- During an interview, Fed chair Powell repeated his grim economic outlook, saying a full recovery is only possible with a vaccine available. Powell assured the Fed hasn’t run out of ammunition but continued to rule out negative rates.
- Germany is reluctant to revive a 2009 scrapping bonus that boosted domestic car sales back then. With the diesel emissions scandal having tainted the industry’s reputation, the car lobby finds it hard to convince the government.
- Chief economist Haldane said the BoE is examining nonstandard policy options, including negative rates, saying they are running low on conventional easing space but stressing implementation isn’t imminent.
- Japanese growth slipped -0.9% q/q in in 2020Q1 even before Covid-19 escalated, thus sliding into a recession that is unlikely to end soon. Consumer spending and investing all grinded to a halt in the first weeks of 2020Q1.
- More than one year of political stalemate later, Israel has finally sworn in a power-sharing coalition government yesterday. Netanyahu is to serve the next 18 months before (former opposition leader) Gantz takes over in 2021.
- Today’s economic calendar is close to empty with only housing market confidence due in the US. A few central bank speeches are due. Belgium taps the bond market.
Currencies: EUR/GBP Extends Gains After Breaking Out Of Sideways Range
EUR/GBP heading to the 0.90 barrier?
The US eco data and a flaring up of US-China trade tensions dominated market headlines on Friday but the impact on the major USD cross rates was modest. The (TW) dollar was well bid ahead of the publication of the US April retail sales. Sales declined 16.4% M/M, much more than expected. It caused a temporary setback of the dollar, but the move had no strong legs. EUR/USD closed slightly stronger at 1.0820. As was often the case, USD/JPY again deviated from the broader intra-day USD price pattern, but also closed in well-known-territory at 107.06.
During the weekend, Fed Chair Powell indicated that it could take until the end of next year for the US economy to recover from corona. He added that the Fed still has options to support the economy. The latter supports markets this morning. Asian equity indices are mostly in green and US futures show gains of about 1%. The yuan continues to trade soft (USD/CNY 7.11) as trade tension continue to linger. Japan slipped into rescission with a second consecutive quarter of negative growth, but the Q1 decline (-0.9% Q/Q) was milder than expected. USD/JPY hovers north of the 107 level. EUR/USD shows no clear trend (1.0820).
There are few data today and later this week calendar is backloaded with, amongst others, EMU PMI’s scheduled on Friday. Global sentiment, including headlines on trade tensions, will likely set the tone for global (FX) trading. Sentiment looks constructive at the start of the week, but for now we don’t see a trigger to push the major USD cross rates out of their established ranges. Of late, any EUR/USD uptick soon met selling interest. EU institutional uncertainty (German court ruling) doesn’t help the euro to profit from (temporary) USD downticks. Uncertainty on trade/supply chains is a euro negative too. We keep the view that room for sustained EUR/USD gains stays limited. We expect more sideways trading in the 1.0727/1.09 range.
The EUR/GBP break of the 0.8860/75 area was confirmed Friday. The sterling decline accelerated as headlines from the EU-UK brexit negotiations showed an almost complete stalemate. EUR/GBP closed north of 0.89. During the weekend, BoE chief economist Haldane said the bank is studying alternative measures, including negative rates. This continues to weigh on sterling. For now, the EUR/GBP rebound can still be extended. A test of the 0.90 barrier might be on the cards.
EUR/USD locked in tight sideways range. Topside tests recently soon met selling interest.
