- Rates: Subject to gyrations in risk sentiment
Risk sentiment, eco data and fiscal/monetary stimulus actions/hopes outweighed daily corona struggles and geopolitics yesterday. The very long end of the US yield curve underperformed significantly ahead of tonight’s 20yr bond sale. Asian risk sentiment is much more fragile this morning. Core bonds tend to profit. - Currencies: Dollar in consolidation modus
The dollar was supported by strong US retail sales and higher US yields. However, major USD cross rates including EUR/USD and USD/JPY are holding within established ranges. We don’t expect today’s data or events to trigger a significant technical break. Sterling gains in the wake of the Monday’s positive EU-UK brexit talks were short-lived
The Sunrise Headlines
- Wall Street soared in the wake of the Fed’s announcement and a jump in retail sales. The DJI (+2.04%) outperformed. Asia trades mixed-to-negative amid lingering worries about the coronavirus and geopolitical tensions.
- Rumble in the east. At least 20 Indian soldiers were killed in a clash with China at the Himalayan border, the deadliest incident in 40 years. North Korea rejected SK’s request to send envoys and will redeploy troops to border areas.
- The US loosened sanctions on China’s Huawei, allowing companies to work with Huawei on setting standards for the likes of 5G. The move came as the US feared excluding itself from global talks shaping emerging technologies.
- Europe’s frugal four co-wrote an article ahead of the EU summit tomorrow, criticizing the EC proposal to distribute €500 bn of borrowed money, arguing it should be lent and crisis-related criteria should be used in the equation.
- In a related report, Germany’s Merkel told lawmakers she doesn’t expect an agreement on the recovery plan until July, adding that Germany also should be able to receive part of the funds.
- Dr. Fauci of the WH coronavirus task force called on several states to act rapidly to prevent the recent rise in cases from becoming a “real surge”. Texas, Florida and Arizona all reported their biggest daily increase yesterday.
- Today’s economic calendar is only of secondary importance. Inflation figures are due in the UK and the EU (final reading). The US publishes May housing data. OPEC+ holds a meeting. Germany and the US tap the bond market
Currencies: Dollar In Consolidation Modus
Dollar in consolidation modus
The (trade-weighted) dollar reversed Monday’s setback even as global sentiment remained constructive. EUR/USD started in the mid-1.13 area, but failed to extend gains, even as German ZEW investor sentiment printed stronger than expected. Later, US May retail sales printed much stronger than expected. Equities gained further, but this time FX traders were more inspired by the better US data and higher US yields rather than risk sentiment.
EUR/USD dropped below the 1.13 handle to close at 1.1264. Gains in USD/JPY were modest given the positive risk sentiment and the rise in US yields. The pair couldn’t hold on to post-retail sales gains and closed little changed at 107.32. This morning, sentiment on Asian markets is less buoyant compared to the Europe/WS yesterday. Uncertainty on a corona outbreak in Beijing, geopolitical tensions on the Korean peninsula and between China and India cause investor caution. Japanese exports (-28.3%) and imports (-26.2% Y/Y) dropped more than expected, with especially exports to the US hit hard. The yen strengthens, but USD/JPY is holding north of 107, for now. EUR/USD shows no clear trend holding in the 1.1260/80 area.
Today, European data are mostly second tier and outdated. US housing data are also no market mover. The US Treasury will sell 20-y bonds. Yesterday, the dollar profited from higher US yields, but we don’t expect that to be the case again if it isn’t related to strong US data. Markets will also follow the debate on the EU rescue fund ahead of this week’s EU summit. However, no agreement is expected yet. So risk sentiment will probably remain the main driver for USD (EUR/USD) trading.
Last week, the three week-long EUR/USD rally fell prey to profit taking, but for now the correction remained modest. First important support comes in near 1.1160. We expect that area to hold. We expect more consolidative price action in the 1.12/1.1425 range
Yesterday, sterling stated a strong footing supported by a risk-on sentiment and positive headlines on the EU-UK brexit talks after Monday’s call between PM Johnson and EU leaders. However, gains evaporated soon (EUR/GBP close at 8959). A slow UK recovery and markets pondering potential future steps of the BoE (including negative interest rates or yield curve control) cap a sustained sterling rebound. For now, the bottom of the 0.8860/0.9055 range looks rather well protected. EUR/GBP is again near the 0.90 handle
EUR/USD: consolidation pattern. 1.1160 support stays out of reach
