- R Rates: Fed Bullard puts 50 bps July rate cut scenario to bed
Comments by Fed Bullard – not the environment for a 50 bps rate cut – and Fed chair Powell – repeat that an ounce of prevention is worth more than a pound of cure – clearly point to a 25 bps rate cut in July. Consolidation or profit taking on core bonds is possible. Friday’s PCE deflators and the G20 meeting or next high profile events. - Currencies: EUR/USD rally takes a breather, but picture remains constructive
EUR/USD couldn’t sustain north of 1.14, triggering modest profit taking. The dollar gained some further ground as Fed governors Bullard and Powell downplayed the need for a 50 bps rate cut. Even so, the technical picture remains EUR/USD positive. We stay cautious on the dollar going into the G20 meeting later this week.
The Sunrise Headlines
- WS slipped up to -1.5% as Fed officials said risks to the downside have increased (Powell) but downplayed the case for a 50bp cut already in July (Bullard). Asian markets are trading mixed with Japan underperforming (-0.7%).
- The central bank of New Zealand kept rates stable at 1.50% but said that rate cuts further out might be warranted given the weakened economic outlook and increased downside risks related to trade, employment and inflation.
- The US is willing to put off (the threat of) tariffs on an additional $300 bln of Chinese imports as preparations to resume trade talks are ongoing. President Trump and Xi are expected to meet at the G20 summit later this week.
- Denmark’s Social Democrat leader Frederiksen announced she has finalised terms to form a one-party minority government. Frederiksen will rely on the backing of three other left and centre-left parties to pass laws.
- The Chinese Beige Book’s anecdotical evidence showed a modest improvement of the economy in Q2. Serious risks lie ahead though, referring to record inventories, increased shadow finance and surprise inflation pressures.
- The odds of Spanish repeat elections rise after the Socialists refused Podemos’ demand to form a coalition, seeking to rule in minority instead. Resignations by Ciudadanos party members also added to the political deadlock just yesterday.
- Today’s economic calendar eyes rather thin. The US publishes May durable goods orders. Several central bankers (Fed, ECB, BoE) are scheduled to speak. Italy and the US tap the bond market.
Currencies: EUR/USD Rally Takes A Breather, But Picture Remains Constructive
EUR/USD rally taking a breather, for now.
The recent EUR/USD up move fell prey to modest profit taking. EUR/USD couldn’t sustain north of 1.14 as investors pondered the impact of geopolitical tensions and the upcoming G20 meeting. US consumer confidence was weak but with little impact. Later, the dollar gained some further ground as Fed dove Bullard downplayed the need for a 50 bp rate cut. Fed chair Powell took a balanced approach. The US economy is still in a good place, but risks have grown. He supports the idea of a pre-emptive rate cut. QE can still be used if necessary. The dollar reversed part of its earlier gains. EUR/USD closed at 1.1366. USD/JPY finished at 107.20.
This morning, Asian equities join the correction on WS yesterday. Investors are still awaiting the results of the G20 meeting, both with respect to the US-China trade conflict and the on other global issues. The dollar gains some further ground after Fed speakers downplayed the case for a 50 bp rate cut. EUR/USD is trading in the 1.1355/60 area. USD/JPY rebound back to the mid 107 area. The Reserve Bank of New-Zeeland left its policy rate unchanged but indicated that lower rates may still be needed. NZD/USD is trading in the 0.6650 area. There are few important data in Europe. The US durable orders are expected little changed/soft. The series is very volatile and probably won’t change the market view on the economy or on monetary policy. So, investors will continue to adapt positions to prepare for the G20 and the next steps in the China-US trade talks.
Yesterday, EUR/USD corrected off the 1.14+ recent top. Even so, the picture remains EUR/USD constructive. We remain cautious on the dollar going into the G20 meeting as we assume that president Trump will reiterate its case that the dollar is too strong. EUR/USD 1.1448 remains the next technical reference on the charts.
Yesterday, EUR/GBP hovered up and down in the 0.8915/0.8965 area. However, in the end sterling weakness prevailed. Today, several BoE governors, including governor Carney will testify before Parliaments Treasury committee. Markets will look out whether the BoE will amend its tightening bias. Given lingering political uncertainty, there is no big case for a sustained sterling rebound. The EUR/GBP 0.90 barrier is coming within reach. EUR/GBP 0.9108 marks the early January peak. We expect EUR/GBP to hold rather strong.
Dollar rebounds as Fed downplays 50 bp rate cut, but picture remains EUR/USD supportive going into G20 meeting
