Peripheral countries profit from last week’s dovish signal from the ECB by stepping up issuance. ECB President Draghi said the central bank stands ready to ease if necessary. That could be by cutting policy rates (but adding mitigating measures), extending forward guidance or revamping asset purchases. Especially that latter prospect soothes peripheral bond investors. Today, ECB’s Villeroy reiterated that the ECB could do more if necessary. However, his comments hat little direct impact on German/EMU core yields The German yield curve declines between -0.4 bp (2-yr) and -0.8 bp (30-y). The Italian debt agency successfully launched a new 20-yr benchmark deal (Mar2040). The bond was prices to yield 12 bps over BTPS 2.95% Sep2038, tighter than +16 bps initial price takings and +14 bps initial guidance. The order book was in excess of €23.5bn, allowing the Treasury to print €6bn. The Spanish treasury launched a long 10-yr bond (Oct2029) at MS + 33 bps, tighter than MS +35 bps guidance and significantly lower than the MS + 65 bps for a new 10-yr Bond at the start of the year. Portugal tapped 2029 and 2034 bonds for a combined €1.3bn. The auction yield at the 10-yr tap was an all-time low for that tenor of 0.639%. US yields drifted lower from the start of trading this morning as risk sentiment deteriorated. US May CPI inflation (core 2.0%, headline 1.8%) was marginally softer than expected. US yields dipped briefly, but the move couldn’t be sustained. Still, the US yield curve bull steepens with the 2-y yield declining 4.1 bps while the 30-y is rising 1.1 bp.

EUR/USD trading was mainly technical in nature as there was no news important enough to push the pair outside the  1.1290/1.1350 consolidation pattern that reigned trading post payrolls. A new, albeit modest decline in US yields due the risk-off sentiment narrowed the USD-EMU (German) spread but a new attempt of EUR/USD to set a ‘post-payrolls’ top failed again. In the afternoon, US CPI also came out slightly softer than expected. US yields declined briefly, but EUR/USD still failed to clear the 1.1340/50 resistance. The decline of USD/JPY was also limited and short-lived. The dollar currently trades again off the intraday lows. EUR/USD is changing hands in the 1.1315 area. USD/JPY returned to the 108.50 area. Apparently there is currently already quite some Fed easing discounted in the dollar. More high profile (political?) news is probably needed to trigger a new sustained USD downleg.

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Sterling bottomed/rebounded yesterday as a solid labour market report at least caused markets pondering the BoE rhetoric that a rate hike might be needed in a not-that-distant future. Today, sterling even got some support from the political scene. Boris Johnson in a speech for his campaign to become conservative leader and UK PM said that he wants Britain the leave the EU at the end of October. He prepares for a no deal Brexit, but is not aiming for that option. The latter was seen as less hawkish compared to other comments in the past and supported sterling. EUR/GBP drifted lower from the 0.8910 area to currently trade in the 0.8880 area. Today’s price action apparently confirms that already quite some bad news is discounted in sterling and that a further rebound of EUR/GBP to the 0.90/0.91 area might not be that evident short-term.

News Headlines:

Turkish central bank (CBRT) kept rates unchanged at 24% ahead of an election redo in Istanbul (June 23). The CBRT altered its statement to the dovish side however. It paved the way for a possible rate cut as soon as July, provided inflation continues to drop and geopolitical/trade tensions – which harmed the lira in the past – do not flare up.

US headline CPI slowed from 2.0% YoY (0.3% MoM) to 1.8% (0.1% MoM) in May as increased food prices were insufficient to offset the drop in energy. Core inflation (2.0% YoY, 0.1% MoM) also decelerated, slightly undershooting market expectations with shelter price increases halving compared to last month.


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