- Rates: ECB to follow Fed’s lead
The Fed extended its state of emergency by pledging to continue supporting the suffering US economy. Powell expressed medium term concerns and downside risks, excluding a swift recovery. Markets reacted stoic. It’s ECB’s Lagarde turn today. We expect a similar statement with the ECB possible upping the scope or size of its asset purchases. - Currencies: EUR/USD nears 1.09 area. Will ECB support a ‘break’?
Yesterday, the dollar lost modest ground as the risk rally continued and Fed’s Powell repeated his version of the ‘whatever it takes’ commitment. Today, global sentiment and the ECB decision will guide FX trading. The euro needs a strong sign of coordinated monetary and fiscal support. The ECB can try to convince markets on its part of that job later today.
The Sunrise Headlines
- WS rallied as hopes for an effective treatment against the coronavirus buoyed sentiment, shrugging of bleak GDP data. The Nasdaq outperformed (3.57%). Asian markets follow suit, with Japan (2.95%) leading gains in a catch-up move.
- The Fed left rates unchanged near zero (0-0.25%) and pledged to do whatever it takes to shore up the economy, warning the coronacrisis will “weigh heavily” on the near-term outlook and poses “considerable risks” for the medium term.
- Gilead announced its potential Covid-19 remdesivir produced positive results in a US study. The New York Times reported the FDA plans to grant the emergency-use authorization to the drug as early as Wednesday.
- Norway joined international efforts to cut oil supply for the first time in 18 years by 250K barrels/day in June – more than 13% of total output – and 134K barrels/day in the second half of the year in a bid to firm up oil prices.
- The Trump administration reportedly contemplates offering loans to the ailing US oil industry, perhaps in return for a financial stake. USTS Mnuchin stressed the government considers different strategies but won’t bail out the industry.
- China’s manufacturing PMI eased to 50.8 from 52 in April as factories resumed work. Details showed a worsening slump in exports orders (33.5 from 46.4) pointing to a sliding global demand. The services gauge rose to 53.4 from 53.
- Today’s economic calendar is jampacked, containing Q1 GDP prints and inflation figures across Europe and jobless claims in the US. All eyes are on the ECB: will Lagarde take further action?
Currencies: EUR/USD Nears 1.09 Area. Will ECB Support A ‘Break’?
Will ECB help for a EUR/USD 1.09 test/break?
The global risk rebound continued yesterday. Investors look forward to a restart of the economy as the measures to contain the corona virus might gradually be lifted. However, the equity really again had only a modest impact on yields and on the big USD cross rates. Data including a 4.8% Q1 contraction of US activity, didn’t affect (USD) trading. The dollar traded tentatively lower and lost some further ground as chair Powell reiterated that the Fed will use all available tools to support the economy. EUR/USD closed at 1.0873. USD/JPY finished at 106.68.
This morning, Asian equities join the rally on WS. US futures extend gains on good earnings from the likes of Facebook. China PMI’s were mixed as poor export demand is weighing on manufacturing activity. The yuan rebounded (USD/CNY 7.0560) on hopes for further fiscal stimulus. The Aussie dollar is trading near a 7-week high (AUD/USD0.0.6560) as the RBA didn’t buy bonds under its QE program today. It apparently considers market conditions have substantially improved. The dollar hovers near recent lows (DXY 99.60 area, USD/JPY 106.60). EUR/USD is losing a few ticks (1.0860).
Today’s calendar contains the EMU Q1 GDP, the EMU CPI, the US jobless claims and the Chicago PMI. The data are interesting but probably have limited impact on (FX) markets. Global sentiment and the ECB policy meeting will be the main drivers for EUR/USD trading. The euro probably needs a strong signal policy makers will be able to provide a coordinated fiscal on monetary response. More stimulus (also monetary) is probably more supportive for the euro than a message that the ECB has already done a lot. Even so, the fiscal topic won’t be ‘solved’ today. In this context, it might remain difficult for the euro to fully profit from a (gradual) USD decline. This week, EUR/USD slipped briefly below 1.0770, but the downside test was rejected. More consolidation in the 1.0730/1.10 range might be on the cards. Of late, the 1.09 area already proved to be a quite though resistance. Will the combination of ECB stimulus and global risk-on finally trigger a (guarded) step higher?
Sterling trade weak at the start of the session, but the global risk-on put a floor for the UK currency. EUR/GBP gradually returned back lower in the 0.87 big figure. There are few UK data today. With no progress in the Brexit talks and the UK potentially lagging the global trend toward reopening the economy, we see more consolidative EUR/GBP price action near the 0.8680/0.87 support.
EUR/USD near 1.09 resistance area. Will ECB stimulus cause a test, or even a break?
