• Rates: Lower for longer trumps end of APP
    The ECB’s change to forward guidance on rates, lower for longer, trumped the announcement to end APP this year and caused investors to push back early rate hike bets. German yields dropped up to 7 bps. The German and US 10-yr yields’ test of respectively 0.5% and 3% resistance failed this week, suggesting consolidation ahead.
  • Currencies: EUR/USD nears 1.1510 correction low as ECB cements low rates
    Yesterday, EUR/USD nosedived as the ECB committed to keep policy rates unchanged at least through the summer of next year. The dollar remains supported by strong US data. Today, markets might further adapt positions in the wake of yesterday’s ECB meeting. EUR/USD nears the 1.1510 correction low. Rising trade tension probably won’t help the euro as well.

The Sunrise Headlines

  • The US equity markets reacted positively to the ECB news, with only the DOW JONES closing with losses (-0.1%). Nasdaq wins 0.85%. Asian markets opened mixed this morning, with Japan recording gains and China in red.
  • The Bank of Japan (BOJ) kept its short-term interest rate target at -0.1%, continuing its loose monetary policy. It states that the economy is expanding only moderately and inflation tempered in May, moving around 0,5-1%.
  • Today, President Trump will approve to impose tariffs on $50bn on Chinese imports. Tariffs will focus on Chinese exports linked to Beijing’s’ “Made in China 2025” plan to lead the world in 10 key sectors, including robotics.
  • UK PM May’s counter proposal for the ‘meaningful vote’ has furiously been rejected. Tory rebels accuse her of going back on an earlier deal. PM May now faces defeat when the EU withdrawal bill returns to the Commons next week.
  • Italy’s new government threatened not to ratify the EU-Canada trade (CETA), which could endanger the entire agreement. Italy’s agriculture minister used “weakening of citizens’ rights” and “unfair competition” as arguments.
  • The European Stability Mechanism (ESM), the euro zone bailout fund, has approved a new key payment. This approval was seen as a precondition to open new debate on new debt relief measures held in Athens next week.
  • The US will release its numbers on Empire Manufacturing for June and the Industrial Production (MoM) for May. In the EU, ECB’s Nowotny and Smets present the Austrian and Belgian Economic Outlook.

Currencies: EUR/USD Nears 1.1510 Correction Low As ECB Cements Low Rates

Euro hammered as ECB cemented rates

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Yesterday, markets anticipated the ECB to make a step toward policy normalisation. The ECB indeed signalled to stop APP end of 2018, but also committed to keep rates unchanged through the summer of 2019. This soft guidance on rates hammered EMU yields and the euro. EUR/USD touched an intraday top in the mid 1.18 area before the ECB decision, but finished the day at 1.1568. USD/JPY wasn’t affected much by the decline in core yields and closed at 110.63 (from 110.34).

This morning, Asian equities are trading mixed. China underperforms. The US preparing a new batch tariffs on Chinese imports and a stronger dollar are potential negatives for Chinese markets. The BOJ left is policy unchanged but downgrades its assessment on inflation after soft data of late. USD/JPY gained a few more ticks and is trading in 110.75 area. EUR/USD (1.1565 area) hovers within reach of the post ECB low.

Today, the final May EMU CPI will be published, expected unchanged at 1.9% Y/Y (headline). The impact from a revision will probably be limited as the ECB cemented expectations on policy rates. In the US, the Empire manufacturing survey, production and Michigan consumer sentiment will be published. US data recently mostly surprised on the upside. Will good data support further USD gains? Markets will also look out for new US import tariffs on Chinese goods. Of late, the dollar and other US assets were quite resilient to the fall-out from trade dispute. Over the previous days, we assumed EUR/USD to stay north of the 1.1510 support as tensions on Italy eased and as we expected the ECB to make a next step to policy normalisation. However, yesterday’s ECB decision signalled that the euro won’t get additional interest rate support anytime soon. We turn more cautious on the single currency and look out how a retest of the EUR/USD 1.1510 support turns out. A rise in the trade tension or a less positive risk sentiment probably also won’t help the euro. The dollar can stay strong for longer.

Yesterday, EUR/GBP nosedived in line with the global post-ECB decline of the euro. Good UK retail sales were only of second tier importance. A further rift within the UK Conservative party on the role of Parliament in the Brexit process also had only limited impact. Brexit might stay on focus today as there are no important UK data. Even after yesterday’s move, we assume that the downside in EUR/GBP remains much better protected than in EUR/USD. First support is seen near 0.87 ahead of the 0.8621 correction low.

EUR/USD: nears 1.1510 correction low as ECB cemented rates

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