Core bonds lose some ground today with US Treasuries underperforming. The Bund and US Note future treaded water in the opening stages of today’s session. The Bund set an intraday high around European noon after reports that the ECB is reviewing its inflation goal of “below, but close to 2% over the medium term.” The revamp would, according to sources, propose a symmetrical approach to the inflation target. The central bank might then keep monetary policy accommodative after a long period of below target inflation by allowing a temporary compensating inflation overshoot. The Bund’s uptick wasn’t met by follow-up buying. Core bonds even changed direction, with US Treasuries underperforming, following a stellar July Philly Fed Business Outlook. The indicator showed a similar rebound after a sharp June decline as the Empire Manufacturing Survey earlier this week. US yields increase by 1.8 bps (5-yr) to 3.1 bps (30-yr) at the time of writing. Changes on the German yield curve range between -1.4 bps (10-yr) and +0.2 bps (2-yr). Peripheral yield spreads vs Germany narrow by 3 bps (Spain) to 8 bps (Greece).

Today was expected to be a calm day for global (FX) trading. There were few data in the US and Europe. The day started in risk-off modus, but this risk off initially supported the euro and yen, not the dollar. Markets saw room for US yields to decline faster than core European yields. EUR/USD drifter higher to the 1.1240/45 area. USD/JPY dropped to the 108.65 area. At the end of the morning session, the gradual move on European interest rate and FX markets were unsettled by headlines that the ECB is studying a revamp of it policy framework (including its inflation targeting). Any conclusion is still far away, but markets concluded that policy stimulation could be cemented for even longer than what is already discounted. A less strict inflation target in theory is negative for the currency. EUR/USD dropped to 1.12 area. From there, some consolidation kicked as markets realized this is still a long and highly uncertain call. In an interview, US Treasury secretary Mnuchin said that there is no change in the dollar policy for now but that it could be considered in future. The comments were a bit too ambiguous to trigger a directional USD move. Remarkably, the dollar hardly profited from a very strong Philly Fed business outlook. EUR/USD is trading in the 1.1215/20 area. USD/JPY hovers just below 108.

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Of late, sterling was on an almost persistent downward trajectory as investors feared the new UK PM could bring the country to a no-deal Brexit. Today the news flow turned a bit constructive and triggered a sterling short squeeze. Headlines from a BBC interview with EU Brexit negotiator Barnier suggested that the EU might be open to renegotiated the Irish backstop. Mid-morning the UK June retail sales also printed very strong at 1.0% M/M, reinforcing the sterling short squeeze. Later, the EU reaffirmed that the withdrawal agreement will not be renegotiated. However, the sterling rebound continued as the UK Parliament voted to support a measure to prevent the next PM suspending Parliament to facilitate a no deal Brexit. EUR/GBP dropped back below the 0.90 barrier (currently 0.8990 area). Cable rebounded to the high 1.24 area. Brexit noise will probably persist in the near future. Even so, the recent decline of sterling might be ready for a pause or could at least slow down.

News Headlines

Lega’s Salvini said today early elections are still possible after the Summer break, saying it is up to 5SM to decide whether the government would survive. Tensions between both coalition partners rose again after clashing on Wednesday over the election of Germany’s von der Leyen as president of the European Commission.

The South African central bank as expected slashed rates to 6.50% today. The SARB cut 2019 growth forecasts to 0.6% but beefed up estimates for 2020 (1.8%) and 2021 (2%). Inflation is expected at 4.4% this year (vs. 4.5% projected earlier), 5.1% in 2020 and 4.6% in 2021 with risks tilted to the upside. The South African rand advanced as some investors were betting on a 50 bps cut which governor Kganyago said was not discussed.


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