- Rates: Over to the ECB…
Thursday’s profit taking move on core bond markets already ended on Friday. Mixed US payrolls and a speech by Fed chair Powell had no big impact. Powell did nothing to alter market expectations of a September rate cut. The eco calendar is extremely thin between today and Thursday’s ECB meeting, leaving sentiment to guide trading. - Currencies: Payrolls and Powell fail to guide USD trading
The dollar gained marginally last Friday on mixed US payrolls and as Fed’s Powell suggested room for further pre-emptive, but cautious Fed easing. At the start of this week, the euro will probably trade with a cautious bias ahead of Thursday’s ECB meeting. Recent sterling rebound is running into resistance as political uncertainty in the UK remains elevated
The Sunrise Headlines
- Wall Street finished a choppy trade session mixed last Friday. The Dow Jones (+0.26%) outperformed. Most Asian markets eke out gains this morning. China (up to 1%) outperforms after it’s central bank eased policy further last week.
- Fed’s Powell said the US outlook remains favourable but sees significant risks looming. He reiterated the central bank will act appropriately to sustain the expansion and to not let inflation fall too far below target.
- UK PM Johnson’s hardline strategy took another toll on its government with Amber Rudd quitting her job over the weekend. Meanwhile, Foreign Secretary Raab said Johnson might challenge the no-deal legislation, if passed.
- Saudi Arabia replaced its energy minister, a key player in the oil industry, al-Falih with Prince bin Salman, son of King Salman. The move breaks convention that ruling family members are not appointed. Oil rises about 1% (Brent $62/b).
- President Erdogan ‘believes’ the central bank will cut rates this Thursday. He added on Friday that the rate is headed towards single digits soon after which inflation will also slow to single digits. EUR/TRY held steady at around 6.3.
- After defying stock caps under the nuclear 2015 deal, Teheran also announced it will no longer abide by the limits imposed on uranium enrichment, adding further pressure on the EU to ease US/Iranian tensions.
- Today’s economic calendar eyes rather meagre with no important data scheduled for release in the US or EMU. Industrial data in the UK is worth watching however.
Currencies: Payrolls And Powell Fail To Guide USD Trading
Payrolls fail to guide USD trading
The dollar showed no clear trend on Friday. Thursday’s rise in core yields was partially reversed with EMU yields declining more than US ones, putting modest pressure on euro ahead of the US payrolls. The labour report was mixed, but OK. Still, the dollar lost temporarily ground after the release, but rebounded later as Fed’s Powell downplayed the risk for a US recession. At the same time, he kept the door open for another pre-emptive rate cut in September. EUR/USD finished the day at marginally lower at 1.1029. USD/JPY closed little changed at 106.92. Overnight, Asian equity markets mostly trade in positive territory as the PBOC reduced the RRR last week. At the same time, China August trade date disappointed (both imports and exports). Still the yuan is trading off its recent lows (USD/CNY 7.1240). USD/JPY hovers near/just below 107. EUR/USD is going nowhere 1.1025/30 area.
There are few important data in the US and Europe today. The eco calendar is mostly backloaded this week with the US CPI and the ECB policy decision on Thursday. US retail sales and consumer confidence will be published on Friday. The market expects substantial ECB easing (at least rate cut). The euro will probably stay in the defensive going into Thursday’s ECB decision. However, we are not convinced that Draghi will be able to provide the high amount stimulus some in the market are hoping for.
The August USD rally halted early last week on poor US manufacturing data. EUR/USD regained the 1.10 mark. We expect technical, euro cautious trading ahead of the ECB meeting. The euro might regain some further ground if the ECB doesn’t deliver on high expectations and/or if the market feels that the bank has only limited ammunition left. From a technical point of view, EUR/USD shows tentative signs of bottoming. A return north of 1.11 would call off the ST negative alert for EUR/USD.
The recent sterling rebound halted last Friday. The UK Parliament last week blocked a no deal Brexit. However, the next steps in the political (Brexit) process remain highly uncertain (elections? When?). Ongoing talks with the EU apparently also don’t yield much progress.
Last week, sterling rebounded to the EUR/GBP mid 0.89 area. This sterling rebound might slow if/as long the political chaos in the UK persists. Some return action back higher north of EUR/GBP 0.90 might be on the cards shortterm.
EUR/USD struggling to hold north of 1.10 barrier as markets look forward to ECB meeting.
