- Rates: The US 10-yr yield nears 19-month low
EU bonds gained ground as investors pondered EU election results and Italy is again in the European Commission’s fiscal crosshairs. Sentiment remains cautiously positive overnight without a clear trigger. Today’s eco data (EU economic confidence and US consumer confidence) is not expected to rattle investors. - Currencies: EUR/USD rebound fails to extend as investors await guidance
EUR/USD held close to the 1.12 mark yesterday. The event risk of the EU elections being out of the way wasn’t enough to inspire further euro gains. Today, the eco calendar contains EU confidence and the US consumer confidence. The dollar is slightly better bid this morning, but we don’t expect EUR/USD to break important levels ahead of next week’s key US data.
The Sunrise Headlines
- US financial markets were closed yesterday (Memorial Day). Asian stock markets are extending yesterday’s gains. China outperforms.
- Salvini’s economic adviser Borghi said Italy must have an ECB seat when Draghi’s term ends because they want a bigger role for the central bank in stimulating economies by having it buy infrastructure bonds issued by the EIB.
- The Tory leadership bid is gaining traction after May’s resignation last Friday. Housing Minister Malthouse entered the race yesterday, following Michael Gove, Andrea Leadsom, Jeremy Hunt and current favourite Boris Johnson.
- ECB governing council Hansson said the central bank’s new TLTRO’s should be less generous given the improvement in economic outlook. He also argued that a tiered ECB deposit rate might be unfair and “make things overly complicated”.
- Austrian Chancellor Kurz lost a no-confidence vote yesterday after the government collapsed following a scandal that drove Kurz’ coalition partner from power. Elections are expected in September.
- Japan’s Economy Minister Motegi downplayed Trump’s comments yesterday that they would strike a deal in August, adding they reflect “his hopes of swift progress” in negotiations but that no timetable for future talks had been set.
- Today’s economic calendar contains the US Conference Board consumer confidence (May) and the EMU economic confidence (May). Also in the EU, the political horse-trading (EC, ECB, European Council) kicks off
Currencies: EUR/USD Rebound Fails To Extend As Investors Await Guidance
USD traders await more clear guidance
FX trading developed in thin market conditions yesterday as US and UK markets were closed. EUR/USD started north of 1.12 as the event risk of the EU elections was out of the way. However, there was no positive driver to extend gains. EUR/USD returned to the 1.12 area. Later, the euro lost a few more ticks on headlines that Italy might be fined by the EC for not complying with the EU budget rules. EUR/USD closed at 1.1194 (from 1.1203). USD/JPY rebounded slightly to close at 109.51.
This morning, most Asian equities are trading higher. The dollar outperforms (DXY 97.80 area). The yuan declines. USD/CNY returns north of 6.90. EUR/USD is trading in the 1.1180 area. USD/JPY hovers in the mid 109 area. Sentiment is not too bad even as there is no indication that the US and China are making progress to solve their trade dispute. Later, the eco calendar is moderately interesting. The EC confidence data are still expected to remain soft. This shouldn’t be a surprise anymore, but even so, it won’t help the euro. US consumer confidence (Conf Board) is expected to improve further (130 from 129.2). Recent US consumer confidence data were rather solid, but it wasn’t always visible in hard data. So, in a day-to-day momentum, data might be tentatively in favour of the dollar. Still we don’t expect a clear directional trend. As is always the case, headlines on trade remain a wildcard.
Last week, EUR/USD tested the 1.1110 support, but a sustained break didn’t occur. A broader USD up-move was capped as investors saw risks that Fed might be forced to cut rates further out in time as trade tensions might hurt US growth. Next week’s early month US data will bring an update in this debate. In the meantime, the EUR/USD downside looks again better protected. Some modest/limited gains in the 1.1110/1.1324 range are possible with intermate resistance at 1.1265.
In thin technical trade (UK markets closed) sterling initially gained a few ticks yesterday, but the prospect of protracted political uncertainty caused EUR/GBP to return to the 0.8830 area. Today, there are only second tier UK eco data. We expect more erratic-like trading in EUR/GBP as the focus remains on the leadership contest in the UK conservative party. The chance/risk that a headline Brexiteer might succeed, makes sustained sterling gains unlikely. A break beyond 0.8840 would further weaken the picture for sterling
EUR/USD rebounded off 2019 low, but no follow-through gains yet.
