Talk of town in today’s trading session obviously was the outcome of yesterday’s FOMC meeting. Markets fully discount a July Fed rate cut with the only remaining question being whether it will be a 25 bps or 50 bps one. UK Gilts outperformed after the BoE acknowledged downside risks to the growth outlook. US Treasuries remained close to the highs reached in Asian trading with the US 10-yr yield extensively testing the 2017 low (2.01%). A disappointing Philly Fed Business Outlook was unable to provide US Treasuries with another boost, which could be a first hint that sufficient softness is discounted short term. Stock markets extended their rally with a new all-time high for the S&P 500. The US yield curve dropped 1.4 bps (30-yr) to 2.5 bps (5-yr). The German yield curve bull flattened with yields down between 1.7 bps (2-yr) and 4.1 bps (30-yr). 10-yr yield spread changes vs Germany are close to unchanged with Italy outperforming (-5 bps). The prospect of additional ECB easing continues to outweigh the bleak economic reality. The country’s statistic office indicated that GDP probably shrank again in Q2 while maintaining the 0.3% forecast for 2019.

The dollar remained in the defensive as the Fed yesterday indicated that it might be close to substantial easing in a not that distant future. Follow-through USD selling set EUR/USD on course for a steady uptrend during the morning session. Headlines that Italian growth might turn negative again in Q2 hardly had any immediate impact on the EUR/USD performance. EUR/USD surpassed the 1.13 barrier at the start of the US trading session. The Philly Fed business outlook was materially weaker than expected. However, an attempt of the dollar to decline further didn’t succeed. EUR/USD trades currently in the 1.13 area. USD/JPY is also trading off the intraday lows (107.65 area). That said, the loss of additional interest rate support clearly weighs on the US currency. First important resistance in EUR/USD at 1.1348 is again on the radar.

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The UK calendar was quite well filled with the May Retail sales and the BoE policy decision. UK May retail sales were close to expectations and a small downward revision of the April sales didn’t change the overview of the economy. EUR/GBP hovered in at tight range just below 0.89 in the run-up to the BoE policy announcement. The BoE left its policy unchanged and basically kept its assessment of the May inflation report, implying a limited and gradual tightening over the policy horizon. At the same time, the BoE sees that global trade tensions have intensified and that the likelihood of a no-deal Brexit has increased. The bank also recognized the divergence between market pricing and the BoE rate path. Investors expect that the BoE ultimately will have to bring its assessment more in line with the easing bias of the Fed and the ECB. Sterling lost slightly ground after the publication of the minutes. EUR/GBP is trading in the 0.8910 area. Cable is trading in the 1.2685 area. The focus for sterling trading will now return the politics and Brexit.

News Headlines

The Norges Bank increased policy rates with 25 bps to 1.25% today and expects to hike again later this year, citing solid economic growth, capacity utilization somewhat above a normal level and core inflation slightly overshooting the inflation target. Increasing trade tensions warrant a cautious normalization approach however.

Turkish president Erdogan said the central bank needs to reverse the current interest rate policy and lower rates rather than increase them. Erdogan holds a controversial view that high interest rates (currently at 24%) are the reason the country is grappling with high inflation (18.7% in May).


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