An uneventful Asian trading session seamlessly flowed over into European dealings. US housing starts (1186k, 17.3% y/y) and building permits (1241k, 2.1% y/y) continued to recover from the Covid-19 hit, albeit a tad slower than expected. Other than that, there was little for investors to do than biding time in the run-up to the EU summit today and Saturday. Related headlines triggered the main intraday gyrations, starting with Germany’s Merkel striking a cautious tone. She couldn’t say whether they will find a compromise this time as talks will be tough and differences are still huge. Hungary’s Orban brought a similar message but added that odds of a deal continue to improve. The Dutch PM Rutte – figurehead of the bloc’s Frugal Four – sounded downbeat, estimating chances of a deal this weekend at less than 50%. He said the funding disbursement should be approved by the Dutch Parliament and in any case wants it tied to reforms. European stocks trade wobbly without direction. Core bonds’ slight upward bias for most of the day was reversed as US markets joined. US yields trade unchanged. German yields edge 1.5 bp higher at the very long end (30-yr). Peripheral spread changes vs. Germany’s 10y yield are mostly negligible. Greece (-5 bps) outperforms.

The euro is trading surprisingly resilient, strong even, despite cautious remarks from top EU officials. EUR/USD, currently hovering near the June high at around 1.142, is headed for its fourth weekly gain with the dollar trading heavy also. The trade-weighted greenback (DXY, 96.16) was headed towards the 96 area but left intraday lows behind after coming close to a test. USD/JPY is filling bids in the 107.2 area. EUR/JPY struggles again to take out this week’s high of 122.50. After two days of relative calm, the pound sterling again suffered a blow. Bank of England governor Bailey isn’t yet convinced by the strength of the UK’s economic recovery. The growth trajectory is highly dependent on medical progress, whether there are second waves and how localized they will be, which all are factors that are difficult to foresee. While EUR/GBP travelled north already long before Bailey’s speech, his comments proved the trigger needed to surpass the 0.91 barrier again. A technical acceleration followed soon after the break higher, pushing the pair beyond this week’s (and month’s) high to trade around 0.912.

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In the ECB survey of professional forecasters, average expected annual HICP inflation was downwardly revised to  0.4%, 1.0% and 1.3% for 2020, 2021 and 2022. Average long term inflation expectations also edged down from 1.7% to 1.6%. Real GDP growth was revised towards a  sharper downturn in 2020 and slightly steeper recovery in subsequent years, resulting in a contraction of the economy by -8.3% in 2020 and growth of 5.7% and 2.4% in 2021 and 2022. The peak in the unemployment rate in the survey is now seen in 2021 at 9.3%.

In its July inflation report, the National bank of Poland still expects inflation only to decline moderately to 3.3% in 2020 as companies have higher costs related to the corona crisis and suffer from partial disruptions in supply chains. A tax hike early this year and high food prices also limit the decline in inflation short-term. However, the full impact of the economic slowdown will keep inflation low in 2021 (1.5% ) and 2022 (2.1%). The central bank forecasts a contraction of economic activity by 5.4% this year, with growth returning at 4.9% in 2021 and 3.7% in 2022.


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