Rates: Fragile balance ahead of tomorrow’s FOMC meeting
Initial losses on core bond markets were undone by a sell-off on US stock markets. Fragile risk sentiment and the possibility of a hawkish shift at tomorrow’s Fed meeting, keep bonds currently in balance. The US Note future keeps underperforming the German Bund.
Currencies: EUR/USD balance restored after hawkish ECB rumours
A downside test of EUR/USD was blocked yesterday by the EU/UK transition deal and by comments on the ECB ending APP this year. Today, markets might shift into wait-and-see modus ahead of tomorrow’s Fed decision. However, there is plentiful potential event risk that might unsettle (currency) markets.
The Sunrise Headlines
- US stock markets lost up to 1.85% yesterday (Nasdaq) on reports of a digital tax by the EU. Facebook also dragged the index lower after a data breach claim. Asian equities opened weak, but sentiment improves during dealings. They are mixed with China and Japan underperforming (-0.5%).
- The Washington Post reports that US President Trump prepares to hit China with $60bn in tariffs by Friday, doubling aides’ earlier proposal in an escalation of trade tensions.
- ECB Mersch, one of the more hawkish officials, said everything is in place for the return of stable euro-area inflation, putting the central bank on course to halt its bond-buying program later this year.
- Saudi Arabia called the 2015 nuclear deal between Iran and world powers a “flawed agreement”, on the eve of a meeting between the Saudi crown prince and US President Trump who have both been highly critical of Iran.
- A majority in Norway’s parliament signaled it will try to oust the nation’s justice minister after a controversial Facebook post, in a move that will probably force PM Solberg to put her whole cabinet up for a vote.
- Chinese President Xi Jinping warned self-ruled Taiwan that it will face the “punishment of history” for any attempt at separatism, offering his strongest warning yet to the island claimed by China as its sacred territory.
- Today’s eco calendar contains UK inflation, German ZEW investor confidence and EMU consumer confidence. Germany holds a 2-yr Schatz auction
Currencies: EUR/USD Balance Restored After Hawkish ECB Rumours
EUR/USD balance restored after ‘ECB rumours’
Two factors changed fortunes for the euro yesterday. First, the UK and the EU agreed on a transition deal giving UK firms access to the common market till end 2020. This propelled sterling and, to a lesser extent the euro (against the dollar). Second, the rhetoric on the ECB turned less dovish on a Reuters article that there is consensus within the ECB to end APP by the end of this year. EUR/USD traded near 1.2260 yesterday morning, gained almost one big figure and closed the session at 1.2335. The equity sell-off had only a limited impact on the dollar. USD/JPY closed the session little changed at 106.10.
Sentiment in Asia remains risk-off this morning, but the losses are modest compared to WS yesterday. USD/JPY stays relatively well bid. The pair is said to be supported by importer related buying. EUR/JPY buying after yesterday’s ECB rumors might also be in play. EUR/USD maintains yesterday’s gains, but stabilizes near yesterday’s close. The RBA minutes gave a balanced view on the economy and inflation with little impact on the AUD/USD which holds in the low 0.77 area.
German ZEW investor sentiment and the EC consumer confidence will be published. Some easing is expected for both indicators. They will probably only be of intraday significance, at best. Last week, the euro ceded modest ground on soft ECB talk, highlighting ongoing low inflation. However, the balance between the euro and dollar looks restored after yesterday’s Reuters’ comments. This morning’s constructive performance of USD/JPY despite a global risk-off context suggests some USD buying interest going into the FOMC meeting. However, this probably won’t help EUR/USD bears. Yesterday’s rejected test of the 1.2260 area propelled EUR/USD back in the established consolidation pattern. There is probably a really hawkish Fed-message needed for new downside test. The trade tariffs debate and equity sentiment remain (tentatively negative) wildcards for the dollar.
Sterling jumped yesterday after the EU/UK transition deal. Headline UK inflation is expected to ease from 3.0% to 2.8% today. (Inflation) data might get some more weight for GBP-trading.as Brexit moves to the background. Especially an upside surprise might reinforce BoE rate hike expectations and push EUR/GBP further south in the 0.8950/0.8690 trading range. We don’t anticipate a downside break yet.
EUR/USD returns higher in established range as ECB is said to end APP this year
