- Rates: Powell assures Fed’s extended stay
The US central bank solidified expectations of an ultra-easy monetary policy stance for the foreseeable future. Policy rates will remain at the current lower bound for the 2020-2020 horizon with US Treasury purchases continuing at least at the current pace and as long as necessary. The US 10-yr yield returned in its April-May trading band. - Currencies: Fed keeps soft tone, but dollar supported as sentiment turns risk-off
The dollar initially touched a new correction low yesterday as the Fed expects to keep rates near zero for long. However, the USD decline finally shows signs of fatigue as the US currency reattracts some safe haven flows. A technically correction in the likes of EUR/USD might be on the cards.
The Sunrise Headlines
- Wall Street closed mixed again in the wake of the Fed’s policy meeting. The Nasdaq gained 0.67% while the DJI fell 1.04%. Asian stocks trade in the red with Japan (-2.4%) underperforming.
- The Fed kept rates steady yesterday and expects them to remain at present levels until 2022. Its bond buying programme will continue at least at the current pace to support credit flows, market functioning and economic activity.
- EU government envoys have rejected demands to alter Brexit negotiator Barnier’s mandate so that he can offer more concessions to the UK and speed up the process, further adding to the total impasse of the talks.
- Coronavirus cases topped 2 million in the US amid the reopening of several states. Texas posted the highest daily increase of new cases, Florida hit a record 7-day period while hospitalizations in California are the highest since May 13.
- ECB VP de Guindos said policy makers haven’t discussed creating a pan-European bad bank that would deal with unpaid loans as a result of the coronacrisis, as reported by Reuters yesterday.
- Oil prices tumble over 3% this morning after US crude stockpiles rose to a record high, raising again concerns about excess supply against the backdrop of a fragile and uneven global economic recovery. Brent nears $40/b.
- Today’s economic calendar contains US jobless and continuous claims and producer price inflation. EA finance ministers discuss the EC’s recovery proposal ahead of the June Summit. Italy and the US tap the bond market
Currencies: Fed Keeps Soft Tone, But Dollar Supported As Sentiment Turns Risk-Off
Fed keeps soft tone but USD rebounds on risk-off.
Despite this mild risk-off the dollar still traded with a downside bias going into the Fed meeting yesterday. The Fed acknowledged the big setback in the economy (6.5% contraction this year). This justifies a continuation of big policy stimulus. The Fed expects the policy rate to stay at the current low level through 2022. This prospect of near-zero rates ‘sine die’, caused a further (temporary) spike lower of the dollar. EUR/USD briefly spiked above 1.14, to close at 1.1374 (from 1.1340). USD/JPY also continued its protracted downtrend to close at 107.12.
This morning, Asian equities opened mixed to modestly lower, but sentiment is deteriorating as the session develops. Despite yesterday’s soft Fed assessment, the dollar lures some safe haven flows. EUR/USD dropped to currently trade in the 1.1335 area. Even the yen doesn’t outperform the US currency. (USD/JPY 1.0715 area). The risk-off also caused some profit taking in the likes of the Aussie (AUD/USD 0.6925 area) and the kiwi dollar (NZD/USD 0.6495). The yuan also shows tentative signs of easing (USD/CNH 7.07).
Today’s data in the Europe and the US are mostly second tier. Markets will keep an eye at the US jobless claims and look for signs of a cautious further improvement after last week’s better than expected US payrolls. Still , we expect the report to be only of intraday significance for USD trading. EU finance ministers will meet preparing next week’s EU top. Signs of discord on the EU economic recovery package might be a (modest) negative for the euro. Of late, the EUR/USD succeeded a rebound both on USD softness and at the same time euro strength. Over time, the dollar probably will remain in de defensive. Short term, the EUR/USD rally shows signs of fatigue. EUR/USD 1.1495 is strong resistance. A correction/pause in the risk rally might give the USD some breathing space too. 1.1260 is a first support. A return below 1.1157 (38% retr) would question the EUR/USD uptrend.
EUR/GBP trading was mostly technical in nature holding a sideways range in the high 0.88/low 0.89 area for most of the day. Sterling finally lost ground. The EU refused to ease negotiator Barnier’s mandate, making no opening for concessions. This morning, the RICS house price balance touched the lowest level in 10- year. A (modest) risk-off correction) might support a further EUR/GBP bottoming out process.
EUR/USD fails to extend rally despite soft Fed. Time to take a breather?
