• Rates: Fed funds futures rise further above par
    Core bonds hold positive momentum. The Fed Funds Future curve shifts deeper below zero as US States line up to slow, pause or reverse the economic reopening. The German government dismantled the Karlsruhe timebomb by stating that ECB documents fully meet requirements from the constitutional court.
  • Currencies: Dollar hovering up and down with no clear driver
    EUR/USD developed a rollercoaster ride with mixed data, swings in sentiment and technical positioning providing conflicting drivers. The dollar remains well bid this morning, but the EUR/USD 1.1160 support isn’t under test yet. The combination of high UK funding needs and low UK interest rates is weighing on sterling.

The Sunrise Headlines

  • US equities rallied yesterday, undoing a large part of Friday’s losses. The DJI (+2.32%) outperformed. Asian-Pacific stocks rise in lockstep with gains of 1% to 2% (Australia) across the board.
  • The pandemic is not even close to being over and countries should start to implement the right “test, trace, isolate and quarantine” policies, warning that “the worst could be yet to come”, the WHO chief said.
  • Angela Merkel’s bloc with the Greens and Lib Dems agreed on a draft motion to formally accept the ECB’s PSPP. A parliamentary sign-off later will then end a standoff over the bond buying programme that was triggered by the Karlsruhe.
  • Chinese official PMIs (54.2 composite) were better than expected with especially the non-manufacturing gauge well above the neutral 50. New (export) orders rose but employment remained slid deeper into contraction area.
  • Australia’s central bank deputy governor Debelle said the economy will need strong support for quite some time. He argued against the government withdrawing the fiscal support already in September as initially flagged.
  • The Chinese government approved the contested national security law for HK that targets dissenters but might hurt the region’s appeal as financial hub. The US suspended some of the preferential rules its applied to HK yesterday.
  • Today’s eco calendar contains US Chicago PMI and Conference Board consumer confidence for June. The EMU releases May inflation figures. Powell and Mnuchin speak before the House financial panel. Italy taps the bond market

Currencies: Dollar Hovering Up And Down With No Clear Driver

Dollar shows no clear, consistent trading pattern

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The dollar had a rollercoaster ride yesterday. EUR/USD initially jumped higher to the 1.1280+ area. A better global sentiment after Friday’s equity correction eased USD demand. EMU data were mixed with EC confidence improving less than expected but German inflation printing higher (0.8% Y/Y). The USD captured a better bid in US trading even as sentiment improved further and as US (ST) yields declined. Very strong pending home sales added to the intraday USD rebound. However, technical (end quarter) positioning was probably also at play. EUR/USD closed modestly higher at 1.1242. USD/JPY also succeeded a nice intraday gain to close at 107.58

This morning, Asian indices rising up to 2% even as global corona infections continue to rise. Regional data are mixed. Chinese PMI’s printed better good, confirming a gradual recovery, but data in South Korean and Japan disappointed. The USD stays strong despite the risk-on. EUR/USD hovers in the 1.1250/25 area. USD/JPY gains (107.75 area).

Today, the EMU June preliminary inflation is expected at 0.2% Y/Y (core 0.8%), maybe with a slight upward risk. In the US the Chicago PMI and consumer confidence will be published. Fed Chair Powell and Treasury Secretary Mnuchin will appear before a House Financial Panel. US data might come out constructive even as virus infections in the US continue to rise. Fed’s Powell probably will repeat is commitment to support the economy as necessary. Decent US data might provide a rather neutral setup for the dollar but the tentative deterioration of sentiment is USD positive in theory. Last week, EUR/USD corrected modestly lower, but the 1.1160 support area was left intact. We expect this support to hold and look for the EUR/USD cross rate to start some bottoming out process. EUR/USD 1.1349 remains first topside resistance.

Yesterday, sterling continued fighting an uphill battle. EUR/GBP tested the 0.9175 area. The UK government committing to more fiscal spending didn’t help sterling, probably as UK yields declined further. Today, PM Johnson will propose its ‘ New deal’ for a rebuild of the UK economy post corona. Most of the government intentions were already aired of late. The combination of a high funding need and extremely low UK yields weighs on sterling. Even so, after recent setback, the pace of the GBP decline might gradually slow, with 0.9184 resistance nearby

EUR/USD: no clear trend with conflicting factors at work

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