- Rates: Draghi to confirm/add (?) to dovish bias in Sintra
Core bonds grind higher this morning. Eco data won’t define trading with tomorrow’s Fed in mind. ECB President Draghi might keep his dovish bias or even add to it at his introductory speech in Sintra. Will he warn again of de-anchoring inflation expectations? The 5y5y EMU forward inflation swap set an all-time low of 1.1%. - Currencies: EUR/USD stabilizes north of 1.12 ahead of Fed meeting.
The dollar lost marginal ground despite poor USD data yesterday. Investors are reluctant to adapt positions ahead of the Fed meeting. This will still be the case today. Headlines from the ECB Sintra forum might cause intraday euro gyrations. Sterling is still haunted by the political headlines as the next vote to find a new conservative leader takes place today.
The Sunrise Headlines
- Technology shares outperformed on Wall Street yesterday (Nasdaq + 0.62%) while the DJ and S&P500 marginally gained. Except for Japan (stronger yen), Asian equities edge higher.
- The UK braces for the second round in the leadership contest today. Six candidates are left. The least popular contender and the ones with 32 or less votes will be eliminated. Results are expected this evening.
- The Reserve Bank of Australia said that further policy easing is more likely than not as inflation will probably continue to be muted “for some time”, the June minutes showed. The Aussie dollar declined to AUD/USD 0.684.
- The US will send more troops to the Mideast “for defensive purposes”, acting Defense Secretary Shanahan said, citing Iran’s “hostile behaviour”. The move comes days after alleged Iranian attacks on two oil vessels in the Gulf of Oman.
- German officials said Manfred Weber’s bid for presidency of the European Commission is losing momentum, adding they are preparing for a shift in focus if needed toward Weidmann’s call for ECB chair.
- President Trump cut aid to El Salvador, Guatemala and Honduras as a way of forcing the countries to step up migrant reducing measures. The US administration had announced to do so already in March.
- In today’s economic calendar US housing data are worth watching. Final CPI data is due in the EMU. Germany releases its June ZEW indicator. ECB’s Draghi, BoE’s Carney and others speak at the ECB forum in Sintra.
Currencies: EUR/USD stabilizes north of 1.12 ahead of Fed meeting.
EUR/USD stabilizes ahead of Fed decision
The dollar traded choppy yesterday, but in the end changes were limited. US data (Empire manufacturing and NAHB housing index) were poor and caused some intraday USD-weakness. EUR/USD rebounded to the 1.1240/45 area, but the gain couldn’t be sustained. US short-term yields also hardly declined on the poor US data. At the same time, EMU 5Y/5Y forward inflation expectations continued drifting ever lower, raising the case for additional ECB action in a notthat- distant future. EUR/USD reversed most of the intraday gain to close at 1.1218 (from 1.1208). USD/JPY finished the day almost unchanged at 108.54. This morning, Asian equity markets mostly show modest gains with Japan underperforming. There is no high profile eco or political news. The dollar is trading slightly softer as investors are finetuning positions ahead of tomorrow’s Fed decision/statement. EUR/USD is trading in the 1.1235 area. USD/JPY returned to the 108.30 area. The Aussie dollar extends its decline as the RBA minutes suggested that more easing is likely. AUD/USD is trading in the 0.6840 area.
Today, German ZEW investor confidence is expected to ease from -2.1 to -5. We see no big case for a downside surprise. US housing starts and permits are expected more or less stable at decent levels. Geopolitical tensions remain omnipresent (Iran, N-Korea…) but it isn’t sure they will have a direct impact on trading today. Markets will keep a close eye at the ECB forum in Sintra. Friday’s EUR/USD decline marked the end of recent upside test. Investors first want clarity on the Fed easing intentions as a lot is already priced in. At the same time, soft ECB talk weighs on the euro, too. We assume order-driven trade in EUR/USD ahead of tomorrow’s Fed meeting. EUR/USD 1.1200 survived, at least for now. We still assume that sustained USD gains are not evident, even if it will be difficult for the Fed to meet markets expectations on policy easing. Sterling remained in the defensive yesterday. EUR/GBP extended its rebound beyond 0.89. Cable slipped below the 1.2560 support. Today, the second round of vote for a new conservative party leader will take centre stage. With no eco UK eco data on the agenda, political headline risk will probably prevail. Last week, there were tentative signs that that sterling could stabilize, even with the prospect of Boris Johnson becoming PM. However, this relief for sterling proved to be short-lived. The EUR/GB P 0.90/91 resistance is again on the radar.
EUR/USD holding in the middle of the 1.11/1.1350 range as markets await Fed policy decision.
