- Rates: Time for consolidation on core bond markets?
Better-than-expected June Payrolls spurred a profit taking move on core bond markets. The US 10-yr yield closed above 2.01% support. With main eco data released, a 25 bps July Fed rate cut fully discounted and Summer trading conditions kicking in, we might see some consolidation on core bond markets, halting the rally of previous months.
- Currencies: Dollar holding strong post-payrolls
A strong US payrolls report provided the dollar with additional interest rate support Friday. The US currency may preserve recent gains ahead of Fed Powell’s appearance before Congress later this week. However, calls from president Trump on the Fed to ease policy or on a too strong dollar might slow further USD gains
The Sunrise Headlines
- US stocks staged an intraday U-turn on Friday but retreated nonetheless. The S&P underperformed (-0.18%). Asian markets are performing poorly. South- Korea (-3.2%) underperforms amid increasing geopolitical tensions with Japan.
- Iran said it wants to hold talks with the EU in the coming days while also announcing it had exceeded the limits of uranium enrichment under the 2015 deal. The US is allowed to join the talks if it abandons the economic sanctions.
- President Erdogan sacked the central bank governor this weekend, a move that spurred investor concerns again over the central bank’s independency. The Turkish lira slips about 2.5% in Asian trading hours.
- Greek snap elections yesterday turned out a victory for the opposition party. Mitsotakis’ New Democracy had a lead of almost 40%, securing a parliamentary majority to pursue “fewer taxes, many investments […] and growth”.
- Japan will meet South-Korea to explain the (hi-tech) export restrictions it recently imposed after courts in the latter ruled that Japanese companies must compensate Koreans pushed into forced labour during the World Wars.
- Boris Johnson won a key endorsement from Home Secretary Javid, further adding to his chances for victory. A recent YouGov poll showed 74% of the Tories would back Johnson rather than Hunt. The actual voting starts today.
- Today’s economic calendar is to provide few clues for trading. European data is of secondary importance. EU finance ministers meet to discuss (a.o.) the budgetary situation.
Currencies: Dollar Holding Strong Post-Payrolls
Dollar holding strong post payrolls.
The US labour market report was strong Friday, with net job growth at 224 000 printing much stronger than expected. Wage growth (3.1% Y/Y) disappointed again, but the report was strong enough for investors to conclude that a 50 bps Fed rate cut this month has become unlikely. US yields and the dollar jumped higher. EUR/USD closed at 1.1225 (from 1.1285). USD/JPY finished at 108.47 (from 107.82).
This morning, higher US yields are causing profit taking on EM/regional assets. Geopolitical issues (Iran, tensions between South Korea and Japan) also weigh on sentiment. The dollar preserves most of Friday’s gains even as President Trump stepped up its critics on the Fed for not supporting US growth enough. EUR/USD hovers near 1.1225. USD/JPY is drifting lower as the yen attracts safe haven flows. The Turkish lira tumbled after President Erdogan unexpectedly replaced the central bank governor. EUR/TRY jumped to trade in the 6.45 area currently.
Today (and tomorrow) there are mostly second tier data scheduled in Europe and in the US. Markets look forward to Fed Powell’s testimony before Congress on Wednesday and Thursday. The Fed president faces a difficult balancing act. He supports the idea of some pre-emptive Fed action, but the data suggest that there is no case yet for the Fed to act as aggressively as markets discount (and as president Trump wants). EUR/USD trading will probably be order-driven ahead of Powell’s appearances. More pressure from president Trump on the Fed and/or explicit comments on a too strong dollar, might slow further USD gains. Even so, there is no immediate trigger available for a big EUR/USD rebound right now.
Last week, EUR/USD drifted lower in the 1.11/1.14 range, First support comes in at the 1.1181 (correction low). A break would open the way for a return to the year lows (1.1100/10 area). A rebound to the 1.13 would indicate an easing of the downside momtentum.
No change in the EUR/GBP trading pattern yet. The pair remains locked in a tight range close to, but below the 0.90 handle. The debate in the Conservative party on the appropriateness of a no-deal Brexit continues to take centre stage. The stalemate will probably persist, at least till the new party leader/PM will be in place. In this context, sterling will probably remain in the defensive, holding near recent lows.
EUR/USD: drifting lower in the 1.14/1.11 trading range as mar