Tue, May 18, 2021 @ 11:07 GMT
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Sunset Market Commentary


The long end of the European yield curve took off where it left on Friday: rising and underperforming against the US. The EU 10y swap rate trades north of 0.10% for only the second time since March 2020, trying to force a break higher out of a closing triangle pattern. A break puts the 2020 top (0.20%) as a first reference on the radar. The German 10-yr yield paints a similar picture after leaving -0.25% resistance behind. The 2020 top stands at -0.14%. German yields add 1.2 bps (2-yr) to 3.5 bps (10-yr) in a daily perspective. The US yield curve bear steepens with yields increasing up to 1.5 bps (30-yr). Both the US 10-yr yield and 30-yr yield for now fail to conquer last week’s lost support levels at 1.6% and 2.3% respectively. European rates are catching up with the US as pandemic fortunes for the old continent are finally improving. Investors don’t shy away from Thursday’s ECB meeting and Friday’s PMI’s. Rightly so. The ECB frontloaded PEPP-purchases in Q2 2021 and is unlikely to extend that time frame. This implies a start to tapering purchases afterwards. EMU PMI’s might already offer some green shoots and will otherwise be disregarded as being outdated. The eco/event calendar was uninspiring today. Stock markets traded listless. European indices hover between gains of losses. US benchmarks open with small losses after last week’s breath taking rally .

The European underperformance in FI space contributed together with technical factors to EUR/USD’s return above 1.20. The trade weighted dollar’s decline below last week’s low caused accelerated dollar selling. The mirror image for EUR/USD was the break above 1.1990 which turns the technical picture neutral from EUR/USD negative. The pair immediately left 1.2027 (50% retracement of 2021 correction) behind as well. 62% retracement stands at 1.2103. The Japanese yen initially battled the euro to the title of star performer amongst FX majors. EUR/JPY steadied mostly north of 130 with USD/JPY falling below the neckline of a short term double top (108.36). The final target stands at 105.75. In the run-up to the US session, sterling overtook both EUR and JPY as the reopening of the economy breaths new life in the UK currency as well. EUR/GBP changes hands near 0.8620 compared with an open at EUR/GBP 0.8665. GBP/USD rallies from 1.3834 to 1.3953, the highest level since mid-March and ending the March dollar comeback against GBP.

News Headlines

British people headed out to the streets and shops again. Market researcher Springboard said the number of people jumped a whopping 88% in the week to April 17 vs. the previous week as non-essential stores reopened after three months of lockdown. Official March retail sales data due on Friday is expected to show a 1.5-2% m/m increase. The full impact of measures being eased will be seen in April data however.

The Bank of England with UK Treasury today announced the joint creation of a Central Bank Digital Currency (CBDC) Taskforce. The taskforce will coordinate the exploration of a possible UK CBDC, a new form of digital money issued by the UK central bank and to be used by both households and businesses. It would exists next to cash and bank deposits, rather than replacing them.

India’s capital New Delhi will be put under a strict lockdown for six days, starting on today, the city’s Chief Minister announced. The whole of India is facing a much more brutal and deadlier second coronavirus wave with daily cases mounting to 270000, the most in the world. Investors brace for the economic impact and sent the Indian rupee sharply lower in the past few weeks. USD/INR is trading just shy of the 75 mark. This compares to the 72.4 area end of March.

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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