- Rates: ECB remains in assessment mode
Bunds outperformed US Treasuries yesterday, backed by soft EMU PMI’s and an unconvincing ECB. The central bank remains in assessment mode going into the March policy meeting. Positive risk sentiment weighs somewhat on bonds this morning. We expect investors to stay sidelined ahead of next week’s high-level trade talks and Fed meeting. - Currencies: euro stays in the defensive on ongoing negative news flow
Yesterday, EUR/USD declined further in the established range on poor eco data and as the ECB acknowledging downside risk to the economy. The next check for the euro comes with today’s German IFO business release. Sterling continues its impressive rebound/short squeeze. EUR/GBP is testing the key 0.8620 support area
The Sunrise Headlines
- US stock indices closed yesterday’s session overall on a positive footing with only the Dow Jones Index (-0.09%) losing little ground. Asian equities opened higher this morning and enlarge those gains throughout the trading day.
- The US Senate voted two rival bills down that could have re-opened the US government. Border wall funding remains the thorny issue. Trump is now open to a plan to re-open agencies, but only if a down payment on the wall is made.
- UK PM May and the Northern Ireland DUP party are said to be close to agreeing an amendment that would curtail the Irish backstop. The DUP is willing to back May’s Brexit proposal, but only if the backstop has a specific time limit.
- ECB governor Benoit Coeuré said it’s too early to say whether the central bank will hike rates in 2019. He added that guidance on interest rates could be altered if the economic slowdown proves more persistent.
- A Chinese delegation, incl. vice ministers, will travel to Washington on Monday to prepare for two days of high-level trade talks between Chinese Vice Premier Liu He and US Treasury Secretary Steven Mnuchin next Wednesday.
- Consumer inflation in Tokyo unexpectedly rose in January. The headline inflation gauge rose to 0.4%, up from 0.3% in December, beating consensus (0.2%). Core inflation (ex. fresh food and energy) rose to 0.7%, up from 0.6%.
- Today’s economic calendar remains empty in the US (government shutdown). Germany prints January’s IFO business sentiment. Fourth quarter earnings season continues while the ECB releases its survey of Professional Forecasters
Currencies: Euro Stays In The Defensive On Ongoing Negative News Flow
EUR/USD stays in the defensive. Sterling rallies
EUR/USD had a roller-coaster ride yesterday. European yields and the euro nosedived on disappointing EMU PMI’s. EUR/USD dropped further at the start of the ECB press conference as Draghi put the risks to the ECB growth scenario to the downside. EUR/USD rebounded temporarily as the ECB president spook quite guarded on new TLTRO funding. The rebound was short-lived. EUR/USD tumbled briefly below the 1.13 handle on headlines that the German government will cut its 2018 growth forecast to 1.0% from 1.8%. At the same time, US economic adviser Kudlow spoke positive on the US-China trade talks and the US economy. EUR/USD finished the day at 1.1304 (from 1.1381). USD/JPY showed no clear trend an ended the session little changed at 109.64. Asian equities are rebounding further this morning even as uncertainty on several (geopolitical) topics still persists. Tokyo inflation data were slightly higher than expected, but the yen declines on the positive risk sentiment. USD/JPY is again moving toward the 110 barrier. EUR/USD still struggles not to slip below the 1.13 mark.
Today, the publication of the US data (orders, new home sales) is again postponed. In Europe, investors look out whether the German IFO survey confirms (or amends) recent negative news flow on the German economy. Is most of the bad news discounted? If so, the euro decline might slow. However, for that to happen, an unexpected positive surprise is probably needed. There will also again be plenty of headlines on the China-US trade talks ahead of next week’s high level meetings. This week, we had a neutral bias on EUR/USD the pair had again returned in the 1.12/1.15 range after an upside test was rejected. The negative eco news flows on Europe caused the pair to drift lower in this range. First support at 1.1309 was temporarily broken. Next intermediate support comes in at 1.1270/67, ahead of the key 1.1216/1.1189 area. We still assume no sustained downside break.
After a brief pause yesterday morning, the sterling rally resumed. EUR/GBP is extensively testing the 0.8620 support area. This time, the move is triggered by press reports that the DUP party might be prepared to support an (amended) proposal of May’s Brexit plan. Later today, the CBI retail data are also interesting. We find that the sterling rebound has gone far enough given that political event risk remains quite elevated. That said, the EUR/GBP stop losses trend is strong. For now, there is no reason to catch the falling knife until there is a clear technical sign
EUR/USD: testing downside support
