- Rates: More sentiment-driven trading on the cards
Risk sentiment soured somewhat overnight as US President Trump intensifies pressure on China to reach a trade deal. Core bonds find a bid. Today’s trading will likely remain sentiment-driven in absence of eco data/events. Thursday’s PMI’s and ECB meetings are this week’s focus.
- Currencies: EUR/USD struggles to prevent further losses
EUR/USD remained slightly in the defensive yesterday as the IMF downgraded the EMU growth forecasts. The cautious risk sentiment this morning is apparently more negative for the euro than the dollar. EUR/USD is drifting back lower in the 1.13 big figure. Sterling traders continue to assess the likelihood of a Brexit delay, incl. the chances of a new Brexit referendum
The Sunrise Headlines
- US equity markets were closed yesterday in remembrance of Martin Luther King. Asian equities opened with losses this morning, with Chinese indices underperforming. Fading optimism on US-Sino talks is at play.
- US President Trump urged China to stop “playing around” and do a “real trade deal”, as he pointed out China’s weak economy, while China’s President Xi warned top leaders for “sharp and serious dangers of a slackness in spirit.”
- UK PM May isn’t ruling out a delay for Brexit while she repeated that a no-deal scenario is still possible. Opposition Leader Corbyn proposed a series of votes in Parliament, one of which opens the door for a new national referendum.
- The EU is stepping up its efforts to avoid chaos in financial markets if the no-deal Brexit scenario occurs. It announced measures will be taken on the bloc’s level, but reminded national members to take responsibility as well.
- The South Korean economy grew by 1% Q/Q in Q4 2018, beating 0.6% consensus. Growth was mainly driven by a boost in government spending. Exports declined by 2.2% Q/Q, highlighting risks for the open economy.
- Dutch Finance Minister Wopke Hoekstra criticized the agreement between Italy and the European Commission over Italy’s budget proposal. The Dutchman said the EU missed an opportunity and doubts that the numbers add up.
- Today’s economic calendar contains US existing homes sales, UK labour market data and German ZEW investor sentiment. The World Economic Forum in Davos kicks off. Spain launches a new 10yr syndicated benchmark
Currencies: EUR/USD Struggles To Prevent Further Losses
EUR/USD struggles to prevent further losses
USD trading was mostly technical in nature yesterday and developed in thin conditions as US markets were closed. IMF substantially reducing the 2019 economic forecast on Europe didn’t help the euro. The dollar again received wider interest rate support compared to a few weeks ago. For now, this results in a EUR/USD sell-on-upticks pattern. EUR/USD closed little changed at 1.1370. USD/JPY closed a dull session at 109.67.
This morning, Asian equities are ceding ground. Yesterday’s IMF global growth downgrade reinforced uncertainty after recent mediocre China data. President Trump’s most recent tweets on the China-US trade talks also look less positive than was the case recently. The yuan weakens as USD/CNY returns north of 6.80. USD/JPY (109.45 area) is drifting south. EUR/USD still struggles not to fall below the 1.1350 area. The eco calendar is moderately interesting today with the German ZEW sentiment and US existing home sales. We look for signs of stabilization in German investor sentiment. Even so, question is whether it will be enough to improve fortunes for the single currency. (Equity) markets will also keep a close eye on the earnings season and on corporate guidance. Of late, the impact of global risk sentiment on the dollar wasn’t always that straightforward. The jury is still out, but at this stage we have the impression that the euro is again slightly more vulnerable in case of a risk-off sentiment. EUR/USD settled again in the established 1.12/1.15 range after an upside test was rejected. This week, we turned neutral on EUR/USD, looking forward to this week’s EMU sentiment indicators and the ECB policy meeting. Last week, the dollar outperformed, but we look out whether the EUR/USD decline might slow as technical support is lining up from 1.1309 to 1.1270 area.
Sterling initially remained in the defensive yesterday, extending Friday’s correction. However, the UK currency reversed earlier losses even as UK PM May didn’t offer a clear way out of the Brexit impasse in her address before parliament. The likelihood of a Brexit delay remains a mildly sterling supportive. Today, the UK labour data will be published. Wage data might have some intraday impact on the UK currency. If markets sees a rising chance of the UK Labour Party supporting a second referendum, it might be a ST sterling supportive. Last week’s 0.8763/66 correction area is a first intermediate support for EUR/GBP. We remain cautious on sterling longer term
EUR/USD: first intermediate support at 1.1309 again on the radar