Today, core US and European bonds remained well bid, maintaining recent gains, but with limited further upside. Global investor reluctance on risky assets prevailed, but there was no market moving news on the key market topics (trade war, EM tensions etc.). The eco data, both in Europe and in the US, were also too close to expectations to inspire clear directional moves in interest rate markets. Changes on the US yield curve are less than 1 bp. German bonds slightly outperform US ones with the curve bull flattening (-1 bp for the 2-y; -2.36 bp for the 30-y). Intra-EMU spreads versus Germany (10-y) widened up to 4 bp with Greece and Italy underperforming. Italy sold a total of €4.5 bln bond (5 & 10-y). The auction attracted only mediocre investor interest despite recent widening of Italian spreads.
EUR-USD. Today, the USD rally did run into resistance, at least temporarily as the US currency neared/reached important technical barriers. The trade-weighted dollar is extensively testing the 95.15/50 area. EUR/USD came within reach of the 1.1510 support area. Safe haven flows leaving EM were at least partially to blame for the latest up-leg in the USD. This morning, sentiment on EM remained fragile suggesting further USD strength. However, for now, no new USD up-leg started, even as global sentiment on risk remained fragile in the wake of yesterday’s equity losses on US markets. EMU data (EC economic sentiment and German inflation) were not too bad, but were not the focus of FX traders. The same was the case for US data. EUR/USD trades currently in the 1.1570 area. USD/JPY is going nowhere holding a tight range in the low 110 area. The key question for USD trading remains whether the (EM-driven?) risk-off context persists and whether the risk-off trade continues to favour the dollar over the (low-yielding) euro or yen. Some more ‘erratic’ USD trading might be on the cards before this issue is cleared out.
GBP. EUR/GBP finally tested the 0.8843 range top. The combination of end of month positioning squaring, a lack of positive news on Brexit coming from the EU summit and global investor caution were a good enough reasons for EUR/GBP to challenge the 0.8850 area. The decline of cable slowed as the dollar rally shifted into a lower gear. Even so, the picture for this cross rate also remains heavy. The pair is currently trading at around 1.3080. Next resistance at 1.3027 (Oct low) remains within reach.
Economic confidence in the European Union declined for the 8th consecutive month from 112.5 in May to 112.3 in June. The decline, however, is less than expected (112.0). The European Commission stated consumers are getting worried about the outlook for the economy amid escalating trade tensions and rising oil prices.
The Brazilian central bank has sharply revised its growth forecast downwardly for this year. The bank announced it expects the economy to grow only 1.6% this year, coming from the 2.6% growth forecast of only three months ago. The truckers’ strike at the end of May that paralyzed the entire economy is pointed at as one of the key reasons.
National CPI inflation in Germany slows but is still above the 2% target. The consumer prices rose 2.1% from a year earlier, down from 2.2% in May, is in line with market expectations. The higher price of oil was counterbalanced by a smaller growth in services prices.
President Trump is following-up on the nuclear summit he held with Kim Jung Un, by sending his secretary of state Pompeo to North Korea next week. Trump will also hold a first bilateral summit with Vladimir Putin in Helsinki next month, after Trump’s attendance at the NATO summit in Brussels.