- Rates: US CPI and FOMC Minutes take center stage
Risk sentiment turned more cautious overnight on rising geopolitical risks. Today’s US events (CPI and FOMC Minutes) could weigh on US Treasuries, underperforming the Bund. On the European side, we eye a Q&A session by ECB President Draghi who will probably further downplay yesterday’s Nowotny comments. - Currencies: Will US CPI be able to unlock USD stalemate
The dollar ignored a higher than expected US PPI yesterday. The euro was supported by hawkish comments from ECB’s Nowotny. The focus turns to US inflation data today. Both core and headline CPI are expected north of 2.0%. However, will it be enough to give the dollar additional interest rate support?
The Sunrise Headlines
- US stock markets managed to slightly add to opening gains, resulting in a 1.5% to 2% profit on a daily basis. Asian stock markets are mixed overnight with China outperforming (+0.75%).
- The ECB disowned comments by governor Nowotny who said the central bank could lift its deposit rate alone when it starts tightening policy. “Nowotny’s views are his own,” an ECB spokesperson said in a emailed statement.
- China’s factory inflation slowed for a fifth month, from 3.7% Y/Y to 3.1% Y/Y (vs 3.3% Y/Y forecast), while the consumer prices retreated from a 4-yr high (2.9% Y/Y) to 2.1% Y/Y (vs 2.6% Y/Y consensus).
- China will allow domestic and foreign financial firms to compete on an equal footing and “sharply” expand the business scope for foreign banks, central bank governor Yi Gang said. (Reuters)
- The US worked to rally international support for a possible military strike against Syrian President al-Assad for an alleged chemical-weapons attack, drawing initial backing from France, the UK and Saudi Arabia (WSJ).
- Oil prices temporary traded above $71/barrel, the highest level since the end of 2014. Mounting concerns about Syria and rounds of sanctions against Russia and Iran are at play. The US also trimmed its 2018 production forecast.
- Today’s eco calendar contains UK industrial production and US CPI. ECB Draghi, Hakkarainen and Angeloni are scheduled to speak. The Fed publishes Minutes of its previous meeting. Germany, Portugal and the US tap the bond market.
Currencies: Will US CPI Be Able To Unlock USD Stalemate
Will US CPI be able to unlock USD stalemate?
Yesterday, market tensions eased after soft comments from the Chinese president on trade. Still, it didn’t provide a clear guide for USD trading. US PPI was stronger than expected but was largely ignored by FX and bond markets. On the other hand, the euro was supported by hawkish comments from ECB’s Nowotny. He re-opened the debate on ECB policy normalization and suggested that a hike in the deposit rate was possible relatively soon after ending APP. USD/JPY ended the session at 107.20 (from 106.77). EUR/USD finished the day at 1.2356 (from 1.2321).
Overnight, headlines from Chinese officials on trade issues remain soft, but markets apparently want more concrete progress in the US-China trade dispute. Asian equities are trading mixed to modestly higher. The dollar keeps a tentative negative bias. USD/JPY is drifting back south to the 107 area. EUR/USD (1.2360 area) is holding near yesterday’s top.
Today, the US February CPI and the Minutes of the March Fed meeting will be published. Headline CPI is expected at 0.0% M/M and 2.4% Y/Y (from 2.2%). Core inflation is expected at 2.1% Y/Y (from 1.8%). One is inclined to expect higher inflation to provide additional interest rate support for the USD. However, US yields recently settled in a wait-and-see modus, mainly due the uncertainty on the impact of the US-China trade dispute. We look out whether a rise in US inflation (especially in case of an upside surprise) will be able to unlock the stalemate on bond markets and in the dollar. Yesterday’s reaction on the PPI suggests that a substantial positive surprise is needed to provide USD interest rate support. Last week, EUR/USD drifted lower in the 1.2555/1.2155 range. However, a downside test was blocked after disappointing US payrolls. EUR/USD rebounded in the established range. A sustained break of the range bottom will probably remain difficult as long as Fed rate hike expectations are clouded by uncertainty on trade. At the same time, the Nowotny comments helped to solidify the euro downside.
Yesterday, EUR/GBP temporary revisited the 0.87 area on hawkish comments from BoE’s McCafferty, but the move was reversed after the Nowotny comments. Today, the UK trade balance, production data and the NIESR GDP estimate will be published. Markets will look out whether the data will confirm the case for a May BoE rate hike. We doubt that today’s data will be strong enough to trigger further sustained GBP gains, especially against the euro.
EUR/USD rebounding higher in the established range both due to USD softness and ’euro strength’
