Event risk was highly concentrated toward the end of this week with the Fed policy decision yesterday, the ECB policy meeting today and the UK holding parliamentary elections. At the same time, the US should decide whether it will implement a new series of import tariffs on Chinese goods scheduled to kick in on Sunday. This morning, Asian and European markets still looked a bit backward to yesterday’s Fed communication. Core bond yields held near relatively low levels reached yesterday as the Fed indicated that it would keep policy accommodative as it aims for a significant move up of inflation that is also persistent. The soft Fed ‘guidance’ still supported bonds in Asia and Europe this morning. Eco data were second tier and had no impact on trading. Some uncertainty on the outcome of the UK elections probably was a marginal bond supportive too. The ECB as expected left its policy unchanged. At her first press conference at the helm of the ECB, Christine Lagarde kept a balanced tone. The economy still needs substantial policy accommodation, but there are cautious signs that downside risks to growth might be less pronounced. Changes to the growth and inflation outlook were little changed. 2022 inflation is seen at 1.6% . The ECB president also highlighted the role of structural reforms and a growth-friendly fiscal policy. However, she provided little detail on how this should be implemented. Around the open of the US equity markets, President Trump tweeted: “Getting very close to a BIG DEAL with China. They want it, and so do we”. German yields currently are 0.5 bp (2-y) to 2.1% bp (30-y) higher in a daily perspective. The US yield curve also bear steepens with the 2-y rising 1.5 bp and the 30-y up 4.5 bp. This can be considered as some further repositioning after yesterday’s Fed communication (ongoing easy policy to reach higher inflation over the medium term) and due to revived hope on a trade deal. 10-y intra-EMU spreads versus Germany are little changed. Greece outperforms (-4 bp).
On the FX markets, changes in the major USD cross rates were rather small. EUR/USD held well above the 1.11 previous resistance area. The pair tested the mid 1.1150 area, maybe on an unexpected rise in the US jobless claims. However, for now there is no follow-through price action. EUR/USD hovers in the 1.1140 area. Changes in USD/JPY were also very limited. The pair hovers in a tight range roughly between 108.50/70.
Sterling trade rather nervous today as the voting for a new Parliament developed. Some investors repositioning and a poll indicating a slightly smaller majority for the Conservative party cause some jitters in sterling trading. After a spike higher EUR/GBP currently trades again in the 0.8460 area as investors are counting down to the first exit polls after the ballot has finished this evening (22.00 UK time). Cable hovers in the 1.3170 area.
The Swiss central bank (SNB) unsurprisingly held its key policy rate unchanged at the rock bottom of -0.75%. The central bank has been stuck in a negative interest rate environment for many years to prevent an unwanted strengthening of its safe haven currency. The SNB highlighted the “fragile” environment of the franc which remains “highly valued” and reiterated its willingness to intervene in the forex markets as necessary. The central bank acknowledged the negative side effects of its negative interest rate policy but offered no sign of hiking any time soon.
The Turkish central bank slashed its policy rate from 14% to 12%, exceeding expectations of a 1.5% rate cut. The central bank stated that “the current monetary policy stance is considered to be consistent with the projected disinflation path.” With inflation leveling off, the lira stabilizing and the economy emerging from recession, the central bank hints its aggressive easing cycle is coming to an end and it can now move slower to loosen policy.