- Rates: ECB ready to ease policy further if needed
ECB President Draghi signaled readiness to ease policy further if needed. The market reaction suggested that investors think of revamping QE as more likely than cutting policy rates deeper. Focus turns to payrolls today. The US 10-yr yield might retest 2.06% support given downside risks, but we think that sufficient softness is discounted by now. - Currencies: Euro rises despite soft ECB. Will payrolls propel EUR/USD beyond 1.13?
Soft ECB comments were not soft enough yesterday to weaken the euro. EUR/USD retested the 1.13 area. The focus turns to the US payrolls today. We see risks for a mediocre report. If so, it might put the dollar further under pressure. A sustained break beyond EUR/USD 1.1300/24 would further weaken the greenback’s technical picture.
The Sunrise Headlines
- US stock markets edged higher yesterday after reports suggested Mexican tariffs could be delayed. The DJI outperformed (+0.71%). With the exception of India, Asian equities follow US gains. Korea (+1%) outperforms, China is closed.
- The US considers delaying tariffs on Mexican goods that would go into effect on Monday, people familiar with the matter said. Vice President Pence however dismissed the report later, saying the US will move forward with tariffs.
- UK’s PM May formally steps down today. She remains acting leader however until her successor is chosen. 11 MP’s have already announced candidacy. A decision is expected in the week of 22 July.
- PBOC’s Yi said China still has tools to withstand trade headwinds. The central bank governor referred to interest rates, the required reserve ratio and fiscal policy. He added that the PBOC isn’t focussed on the level of the exchange rate.
- Fitch downgraded the Mexican state oil company Pemex to “junk”. The move risks starting a fire sale if other agencies were to follow. It cut the sovereign rating just yesterday, partially inspired by the precarious situation of Pemex.
- Fed Williams’ base case for the US is still an above-trend GDP growth but he sees headwinds from increasing trade tensions. He said he Fed may need to “adjust” rates depending on the future data.
- In today’s economic calendar the US payrolls (May) are particularly interesting after the ADP job report’s strong miss Wednesday. Economic data in the EMU is only of secondary importance
Currencies: Euro Rises Despite Soft ECB. Will Payrolls Propel EUR/USD Beyond 1.13?
Will soft payrolls trigger further USD losses?
The focus for FX trading turned to the ECB meeting yesterday. The ECB ‘eased’ its guidance as indicated to keep rates at current low levels at least through the first half of 2020. Some governors also raised the issue of cutting the deposit rate or restarted QE but this wasn’t deemed necessary yet. Even so, this dovish spin in the ECB communication didn’t weaken the euro. On the contrary, EUR/USD retested the recent correction top just north of 1.13. However, a sustained further break didn’t occur. EUR/USD returned back in the 1.12, partially due to a better bid for the dollar later on (unconfirmed rumours) that the US could delay imposing tariffs on Mexico. EUR/USD closed at 1.1276 (from 1.1221). USD/JPY finished at 108.40 (from 108.46).
This morning, Chinese markets are closed, but CNH is losing slightly ground on officials’ comments downplaying the importance of the USD/CNY 7 level from a policy point of view. Most Asian equity markets are trading in positive territory awaiting the outcome of the US-Mexico talks. EUR/USD trades in the 1.1265 area. USD/JPY is near 108.45/50.
Today, the focus for USD trading will be on the US payrolls. Job growth is expected at a solid 174 000. The jobless rate is seen stable at a multi-decade low (3.6%). Wage growth is seen a 0.3% M/M. We see downside risks for job growth and the unemployment rate. There is not that much room for US yields to decline further as a lot of Fed easing is already discounted. Even so, the dollar might still be sensitive to negative news. Headlines on the US trade policy remain wildcard. We also keep an eye on the debate in the US administration whether it should act action against countries that the US considers have undervalued currencies.
Of late, EUR/USD extensively tested the 1.1110 support, but no break occurred. The USD topside was blocked as markets anticipate substantial Fed rate cuts. EUR/USD still tries to break the 1.1265 level in a sustainable way. A break would improve the technical picture with 1.1324 the next target. We stay cautious on the dollar.
Yesterday, sterling continued to trade weak, especially against the euro, but there was not important enough news to push EUR/GBP beyond recent top in the 0.89 area. Today, UK house price data are probably not that important for sterling trading. Headlines from the political scene will again set the tone for sterling. We expect sterling to stay weak as long as current political stalemate persists.
EUR/USD holding near recent correction top. Will (soft) payrolls trigger a break higher
