Rates: Risk aversion puts support levels in yield at risk
US politics-related risk aversion fills the eco/event void ahead of next week’s FOMC meeting. Core bonds profit with the German 10-yr yield at key and the US 10-yr yield at intermediate support. A break lower would especially be important in Germany, suggesting a technical move towards 0.46%/0.48%. Dovish signals by the ECB could increase Bund momentum.
Currencies: EUR/USD locked in indecisive trading pattern
The dollar remains in the defensive as trade tensions, in particular between the US and China, weigh on the US currency. The picture for EUR/USD is more balanced as the ECB continues to talk very soft on inflation. New economic advisor to US president Trump, Larry Kudlow backs a US strong dollar policy
The Sunrise Headlines
- Concerns over the prospect of a trade war with China weighed on WS yesterday, with industrials leading the way lower (Dow -1%). Asian stock markets trade mixed with China underperforming.
- Lawrence Kudlow, a conservative economic commentator who backs a stronger dollar and would take a tougher line on trade with China, will be the new director of President Trump’s National Economic Council.
- The Trump administration is pressing China to cut its trade surplus with the United States by $100 bn, a White House spokeswoman said, clarifying a tweet last week from President Donald Trump.
- The leader of Italy’s eurosceptic League said a government deal with the anti-system 5-Star Movement was possible after an inconclusive election, raising the prospect of two radical groups running the country.
- Slovak PM Fico offered to resign if his party is allowed to remain in charge of the government, a last ditch effort to avoid early elections in the face of the biggest protests since the fall of communism.
- Slovenian PM Cerar resigned, hours after a key investment project hit a legal obstacle, saying he had also had enough of obstruction from his coalition partners and pressure from trade unions.
- Today’s eco calendar contains US empire manufacturing, weekly jobless claims and Philly Fed business outlook. The Swiss and Norwegian central banks decide on monetary policy. Spain & France tap the bond market
Currencies: EUR/USD Locked In Indecisive Trading Pattern
EUR/USD locked in indecisive trading pattern
The dollar remained in the defensive yesterday after US President Trump fired Rex Tillerson as Secreatry of State. USD/JPY initially hovered in the mid 106 area, but ceded further ground later. US data (PPI, retail sales) were mixed, at best, and the dollar lost interest rate support. The picture for EUR/USD was a bit different. Soft comments from ECB’s Draghi and Praet on inflation capped further euro gains. Later in the session, the new economic advisor of President Trump, Larry Kudlow, advocated a strong dollar but he spoke tough on China. USD/JPY closed the session at 106.32. EUR/USD finished at 1.2368.
Asian equities trade modestly lower overnight. Trade tensions between the US and China remain a source of investor caution. US yields are drifting further south. USD/JPY slipped below the 106 big figure. EUR/USD is changing hands in the 1.2375 area.
There are no important data in Europe today. The US calendar contains the Empire manufacturing survey, import prices, jobless claims and the Philly Fed business outlook. The data probably won’t change markets’ thinking on the Fed’s policy assessment for next week. ST market momentum on interest rates is turning softer, with both US and German yields under downward pressure. LT interest rate differentials might widen in favour of the dollar if the German 10-y yield breaks below the key 0.62% support (see FI part of this report ). Question is whether this will be a big help for the greenback. Trade tensions between the US and China will remain a wildcard for USD trading (and for equity sentiment). We expect the current indecisive EUR/USD trading pattern to persist going into next week’s Fed meeting. An escalation in the US-China trade war would probably be USD negative. Especially USD/JPY is vulnerable. For EUR/USD, a break beyond intermediate resistance at 1.2450 would open the way for a retest of the 1.2550/1.26 area. A break of 1.2155 support looks difficult short-term.
The rebound of cable (partially due to US softness) ran into resistance yesterday ahead of the 1.40 mark. At the same time, the intraday decline of the euro (EUR/USD) weighed slightly on EUR/GBP. The pair drifted back to the 0.8850 area. There are no important UK eco data today. For now, the tensions between the UK and Russia have little impact on sterling. More technically inspired trading for EUR/GBP around current levels might be in the cards.
EUR/USD develops indecisive trading pattern as markets are counting down to next week’s Fed decision
