- Rates: ECB to respond to deteriorating growth and inflation outlook
Core bonds lost additional ground in yesterday’s very positive risk climate. General factors like supply, EU fiscal stimulus and technical elements are at play as well. The German 10-yr yield closed above minor resistance (-0.37%). The ECB is expected to raise its PEPP envelope and strengthen forward guidance because of the weakening growth and inflation outlook. - Currencies: Dollar decline to slow
The global risk rally kept the USD in the defensive yesterday. This morning, sentiment looks like losing some momentum. The rise in LT US yields at some point might also become a modest USD positive. On the euro side of the story, a further easing of the ECB policy is not per se a euro negative. Even so, further EUR/USD gains might become more difficult for here.
The Sunrise Headlines
- US equities extended their rally yesterday with the DJI (+2.05%) outperforming and the Nasdaq (+0.78%) closing in on the ATH. Asian-Pacific markets trade muted though mostly in the green. Australia (+1%) and Thailand (+2.3%) lead.
- The Trump administration is suspending inbound passenger flights from China after China barred the US from re-entering despite several requests. In a first reaction, China said it’ll allow more foreign airlines to resume inbound flights.
- Merkel’s coalition agreed on another €130 bn stimulus package. The deal includes a temporary VAT-reduction, investing in a 5G network and railways and double incentives for electric vehicles (only).
- The US non-manufacturing index rose from 41.8 to 45.5 in May, beating a 44.4 consensus but still below the neutral 50 barrier. Business activity shot up from 26 to 41 as did new orders (41.9, from 32.9) while employment barely rose.
- Australian retail sales slumped a record -17.7% m/m in April while the trade surplus narrowed some 16% as exports fell more than imports. The data mark the start of what is probably going to be the worst quarterly growth in history.
- The Fed expanded its $500 bn emergency lending programme for state and local governments (MLF) so that every state is able to have at least two cities or counties eligible for MLF, regardless of population.
- In today’s economic calendar US jobless and continuous claims are expected to show further easing from the record highs. The ECB is all but certain to boost its PEPP during today’s policy meeting. Spain and France tap the bond market
Currencies: Dollar Decline To Slow
USD correction to slow?
The global risk rally continued yesterday, keeping the dollar in the defensive. Even so, intraday there were tentative signs that the USD decline could slow. A further rise especially in LT US yields maybe can become a factor to slow USD selling. Eco data in the US and Europe were mostly less negative than feared, but had little impact on trading. In the end, the risk repositioning out of the dollar still prevailed. The TW dollar (DXY) closed at 97.28 (from 97.67). EUR/USD finished at 1.1233. USD/JPY still deviated from the USD-decline and closed higher at 108.90.
This morning, Asian equities mostly opened with decent gains, but the momentum gradually eased a bit. Frictions between the US and China persist, this time on the airline sector. A moderation in the equity rally also caused a modest intraday rebound of the dollar. The yuan weakens (USD/CNY 7.125). Recent impressive rally of the Aussie dollar is running into resistance (AUD/USD 0.6915 area). USD/JPY remains well bid and tries to regain the 109 barrier. EUR/USD is losing a few ticks even as Germany approved its additional economic support package.
Today, eco data are mostly second tier, but the US weekly jobless claims still will get ample attention. However, the focus will be on the ECB policy decision. The bank is expected to raise the PEPP to € 1000 bln and might with ease its forward guidance. In theory, a further easing might be a euro negative, but investors recently reacted rather mostly positive to additional support for the economy.
Of late, the risk rally triggered a broad USD correction. If this risk rally slows, it might also slow further USD selling. Of late interest rates were no major driver for FX, but we put the recent rise in (LT) US yields back on our radar. If extended, it could also become (slight) USD supportive. For now, the EUR/USD picture looks constructive, but a pause might be on the cards with 1.1292 (76% retr) a first technical resistance.
EUR/GBP initially traded in the low 0.89 area yesterday, but sterling gradually declined throughout the day. The BoE asking banks to prepare for a no deal Brexit didn’t help sterling. Today, the UK construction PMI will be published. An easing of the risk rally and ongoing negative headlines on the Brexit talks probably keep sterling in the defensive. The 0.8865/0.89 area is becoming a new ST support area.
EUR/USD picture remains constructive, but rally might slow
