EUR indecisive ahead of European Commission final vote

Things are getting serious for EU top position candidates. Following a month of intense negotiations, the 28 EU national leaders finally came with a final list consisting of Charles Michel as President of the European Council (formally elected), Josep Borrell High Representative for Foreign Affairs, ECB President Christine Lagarde and finally President of European Commission Ursula von der Leyen. Yet the final call gets to members of European Parliament, a vote that is expected to be tight and which puts the single currency in torment. A failure to confirm top leaders would not only be a major blow for the bloc, but also for the ECB ahead of next Thursday monetary policy meeting.

Compromise candidate Ursula von der Leyen final pledge to secure EU top positions will likely be a game changer ahead of final vote gathering from 6 pm that requires the backing of a minimum of 374 votes out of 747, although 400 votes would be appropriate for the majority to be able to pass laws. In the event of rejection by MEPs, an emergency summit should occur next week if the leadership package is not approved, which could potentially trigger a EUR rally amid speculations of a less-dovish ECB head by considering Jens Weidmann as a potential candidate. However, that would likely be a short-term view since a dovish council would have the last word anyway. The task is therefore becoming challenging for outsider candidate Ursula von der Leyen as her promises need to convince far-right and left Eurosceptic parties as well as socialist and liberals without being able to count on the Greens which ruled out any support (~10% of total MEP seats).

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EUR/USD is therefore like to remain under pressure short-term. Heading along 1.1230

RBA minutes consolidate dovish bias

Despite a rate cut from the RBA at the beginning of the month July, the Australian dollar reversed momentum following Jerome Powell testimony before the Congress. In fact, G10 commodity currencies outperformed their peers since then with the Kiwi, the Aussie and the NOK rising 1.83%, 1.46% and 1.21%, respectively. Safe-haven currencies were also better bid with the Swissie and yen up 0.94% and 0.71%, respectively.

As mentioned above, on July 2nd, the Reserve Bank of Australia trimmed the Official Cash Rate by 25bps to record low 1% following worries over job market slack and especially the level of underemployment. Indeed, just like his American counterpart, Governor Lowe is committed to use monetary tools not solely to increase price pressure but also to reach full employment.

The minutes were fairly in line with the July statement. More specifically, the minutes highlighted the RBA’s commitment to reduce further the level of interest rates to support growth in employment and incomes and bolster overall economic conditions, with the ultimate goal of lifting inflation back within the 2%-3% target band. All in all, the minutes confirmed the fact that the RBA has a clear dovish bias and will not hesitate to pull the trigger should the conditions justify it. The slowdown of the Chinese economy, together with heightened uncertainty caused by trade tensions across the globe, increase the likelihood of further cut before the end of the year. In addition, the Fed and ECB have already signalled that they are going down that road; there is no doubt the RBA would mimic them. AUD/USD is down 0.10% on Tuesday morning at around $0.7033. Early this morning, the pair tested the resistance that lies at 0.7048 (high from July 4th) and faced rejection. We believe that the slowing Chinese economy, together with the fact that the RBA a much more room to manoeuvre in monetary terms than most of its peers, will prevent the Aussie to extend gain significantly.


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