Markets
The German Bund held a slight upward path yesterday amid trade related risk-off, disappointing French growth and mixed German data. But gains were fairly limited all things considered. German yields lost a little ground, declining 1 bp at the long end of the curve. Peripheral spreads widened up to 3 bps (Greece). US PCE data came in slightly below consensus but the Conference Board consumer confidence crushed expectations. The US yield curve bull steepened with daily yield changes ranging from -1.4 bps (2-yr) to -0.7 (10-yr). We see little reasons for today’s EMU data (Q2 GDP, CPI) to surprise on the upside. Yesterday’s price action however suggests difficulties for the Bund to eke out further gains/the 10-yr yield to decline further (and below -0.4%). In the US, the Fed takes center stage and will probably dwarf the ADP jobs report (expected at a solid 150k). The Fed will probably deliver the 25 bps rate cut discounted by markets. Powell’s task will be to sooth markets who have been running ahead of the Fed quite strongly. The Fed chair will refer to a plethora of risks (geopolitical, trade, Brexit …) and reaffirm its commitment to act “as appropriate” when needed, setting the stage for another rate cut possibly later this year. The Fed could strike a cautious tone regarding monetary policy further out in time, awaiting more guidance from the data and as risks develop. Such a wait-and-see but ready-to-act approach should comfort markets. We therefore don’t expect any aggressive US yield repositioning to occur.
EUR/USD gained some further ground even as the news flow was more supportive to the dollar than to the euro yesterday. EMU data were poor and forward looking indicators show little improvement. In the US, July consumer was strong but also didn’t help the dollar. A global risk-off correction and rising tensions on Brexit also had little impact on the euro. EUR/USD closed at 1.1155 (from 1.1145). USD/JPY hovered near the 108.50 pivot. Today’s calendar is stuffed. In EMU, both the July CPI (expected 1.10%) and Q2 GDP (expected at 0.2% Q/Q) will confirm a sluggish momentum. In theory, they should be euro negative, but the euro resisted poor data quite well of late. Regarding the Fed policy decision, anything different from a 25 bp Fed rate cut would be a surprise for (FX) markets. Markets are positioned for this rate cut to be the start of a protracted easing cycle. To what extent will Fed Chair Powell validate those expectations? Markets will also scrutinize Powell’s press conference. It is unlikely that the Fed will openly confirm markets’ expectations further easing. In theory, this should be USD supportive. However, markets were stubborn to give up their rate cut expectations of late. A focus of Powell on (geo)political and external risks and on inflation might be considered as some kind of soft guidance. The dollar was well bid of late, but failed to break important technical levels. Today’s Fed decision might decide whether the dollar will break below the key EUR/USD 1.11 support. If a break fails again, a modest EUR/USD short- squeeze might be on the cards.
Sterling declined further yesterday as the UK government reiterated its position that it won’t restart negotiations with the EU unless it is prepared to reopen the Withdrawal Agreement. EUR/GBP settled in the upper half of the 0.91 big figure. Today, UK Prime Minister Johnson will visit Northern Ireland. He probably won’t change his rhetoric on Brexit. Uncertainty will probably persist. However, after the recent sharp sell-off, the pace of the decline of UK currency might slow. Investors might start to look for small hints from both sides (EU and/or UK) that could lead to an official contact in one way or another. Even so, there is no reason to fight the sterling negative trend yet.
News Headlines
Australian Q2 inflation picked up more than expected. Prices increased 0.6% QoQ (1.6% YoY) vs. 0.5% (1.5%) expected. Although still below the Australian central bank May forecast of 1.7%, the data raises doubts over the RBA’s rate cut intentions. The Australian dollar advanced some 0.3% against the USD (close to 0.69).
China’s official PMI’s showed that manufacturing confidence recovered slightly but still prints in contraction territory (49.7). Services further declined to 53.7. The mixed bag of data comes as the US and China resume talks today amid low expectations and renewed muscle-flexing by US president Trump.
