- Rates: Inflation reason for concern for Fed/markets?
The path of least resistance remains south for core bonds. The German 10-yr yield is intensively testing -0.18%/-0.15% resistance. US inflation might be eye-catching today with both headline and core inflation expected north of the 2% target. Heavy EMU bond supply could weigh on bonds as well. Speeches by Fed governors and Q4 earnings are wildcards. - Currencies: EUR/USD extends post-payrolls bottoming. Focus turns to US inflation
A further easing of global tensions lifted EUR/USD and USD/JPY yesterday. This morning, positive headlines from China are supporting the yuan and are weighing on the dollar. However, dollar might get renewed interest rate support from higher US inflation data later today. EUR/GBP is testing the post-election top as markets ponder the chance for a BoE rate cut.
The Sunrise Headlines
- Wall Street bagged fresh records and edged up to 1.04% (Nasdaq) fuelled by trade optimism and upcoming Q4 earnings reports. Asian stock markets are trading mixed after a three-day rally, with Malaysia underperforming (-0.66%).
- The US Treasury Department eased tensions with China by lifting its FX manipulator designation against Beijing, stating it made “enforceable commitments” not to devaluate the yuan and increase transparency.
- Chinese exports grew for the first time in five 5 months by 7.6% (Y/Y) in December, beating the consensus of 2.9%, signalling a gradual recovery in demand as trade tensions ease. Imports jumped 16.3% (consensus at 9.6%).
- EU trade chief Phil Hogan is heading to Washington to meet USTR Robert Lighthizer for bilateral talks. Hogan aims to bury the hatchet and prevent a transatlantic commercial war on several fronts
- With Brexit looming, international banks are calling on the EU to maintain easy access to the bloc’s financial markets. The AFME argues the EU’s rules (equivalence process) would jeopardize financial stability.
- Non-voting Fed governor Rosengren warned that the biggest risks facing the US economy are higher inflation and financial stability issues as persistently low borrowing rates could lead to unsustainable asset prices levels.
- Today’s economic calendar schedules US CPI data and NFIB small business optimisms. EU trade chief Logan is due to meet USTR Lighthizer. Spain, Italy and the UK tap the bond market. Q4 earnings start with several US banks
Currencies: EUR/USD Extends Post-Payrolls Bottoming. Focus Turns To US Inflation
EUR/USD bottoms. US CPI in focus
Yesterday, changes in the major USD/FX cross rates were again modest. There were no important data. US equites extended their record race. European equities took a breather. USD/JPY profited further from the risk-on but also from the rise in US and EMU yields. The pair closed at 109.95 (109.45 on Friday). EUR/USD gained only a few ticks, but Friday’s soft US payrolls eased the overall US bid and helped some EUR/USD bottoming. The pair closed at 1.1134 (from 1.1121 on Friday).
This morning, headlines on China are dominating the price moves. 2019 US-China trade declined, but both December exports (USD, +7.6%) and imports (USD, +16.3%) beat expectations, suggesting a bottoming might be in place. Yesterday evening, the US also lifted its designation of China being a currency manipulator as both sides will sign a phase one trade deal tomorrow. The yuan extends its rebound (USD/CNY 6.87/88 area). Chinese equities underperform (modest decline as most other regional indices rally). USD/JPY crossed the 110 threshold (101.10 area). EUR/USD gains are limited (1.1135/40 area).
Later today, we monitor any follow-through of the China developments into European and US markets (weaker dollar?). Regarding the data, US CPI is key. Headline is expected to rise to 2.4% Y/Y. Core is expected stable at 2.3% Y/Y. An upward surprise might give the dollar interest rate support. Markets will also keep an eye on the meeting between EU commissioner Hogan and US trade representative Lighthizer. More signs of mutual trade frictions are a potential euro negative. So, quite a mixed bag of potential drivers for EUR/USD traders today. Despite the post-payrolls bottoming, today’s calendar/events suggest a big leap higher in EUR/USD isn’t that evident.
Last week, EUR/USD dropped temporarily below 1.11, but 1.1066 support survived on soft payrolls. EUR/USD 1.1066 remains our first downside reference. A rebound above 1.1180 would call off the downside alert. Still, a ST break beyond 1.1250 looks far from easy.
Yesterday, sterling remained in the defensive. Of late, several BoE members indicated that the central bank might ease policy sooner than later. Yesterday, poor UK production data added to the sterling negative sentiment. EUR/GBP closed the day at 0.8572. There are no UK eco data today. EUR/GBP is testing the post-election top (0.8592 area). A break would deteriorate the ST technical picture for the UK currency.
EUR/USD extends post-payrolls bottoming. Focus turns to US CPI.
