Markets:
Global core bond trading remained constraint to existing consolidation ranges. Both the Bund and the US Note future set an intraday high after the release of lower than forecast UK inflation numbers (spill-over via UK Gilt market) However, that uptick was short-lived and both had a slightly downwardly oriented bias afterwards in absence of strong trading themes. A small downward revision to EMU headline inflation couldn’t change that. Risk sentiment on stock markets was stable. The US yield curve bear flattened again with yield changes ranging between +1.7 bps (2-yr) and -0.8 bps (30-yr). Hawkish March FOMC Minutes and recent Fed comments triggered the new underperformance of the front end of the US yield curve with the 2-yr yield above 2.4% for the first time since 2008. German yields increase by 0.1 bp (30-yr) to 1.4 bps (5-yr).
There were some tentative signs of a USD rebound this morning. During the morning session, EUR/USD even spiked temporary lower to the mid 1.23 area as EMU March inflation was downwardly revised to 1.3% from 1.4%. However, the dollar wasn’t able to build on this temporary euro weakness later in the session. On the contrary, EUR/USD rebounded back higher in the 1.23 big figure. USD/JPY also reversed part this morning’s cautious gains. The pair trades again in the 107.20 area even as risk sentiment remains constructive. EUR/USD and USD/JPY continue trading within the established ranges. For now any USD up-ticks are still used to reduce USD long positions.
Sterling tested important MT technical resistance against the euro (EUR/GBP 0.8650 area) and the dollar (GBP/USD 1.4345) over the previous days. It even looked that sterling was ready for a sustained break higher. However, today’s UK inflation data finally aborted the sterling positive momentum, at least temporary. UK headline inflation declined to 2.5% Y/Y from 2.7% Y/Y (a stabilization was expected). Core inflation also eased to 2.3%. The inflation outcome is softer than expected. However, we don’t expect today’s inflation outcome to derail the scenario of a May BoE rate hike. Over the previous year and a half, higher inflation eroded Britons real wages/income. This process might halt if the decline in inflation persists. This is a positive for private consumption/growth. The report thus shouldn’t make the BoE change its mind on implementing some cautious policy normalization in May. The jury is still out whether a further rate hike later this year will be needed. Inflation data understandably triggered profit taking in sterling. EUR/GBP jumped from the 0.8640 area and settled in the low 0.87 area. Cable dropped from 1.43+ levels and trades currently in the 1.42 area. The report broke the short-term positive momentum of sterling, However, we don’t expect it to become a start of a real sterling downtrend, unless other high profile news kicks in.
News Headlines:
Turkish President Erdogan called for early elections on June 24, moving them forward by more than a year from their scheduled date. The Turkish lira gains ground after the announcement with EUR/TRY dropping from 5.08 to 5.02.
Top oil exporter Saudi Arabia would be happy to see crude rise to $80 or even $100 a barrel, three industry sources said, a sign Riyadh will seek no changes to an OPEC supply-cutting deal even though the agreement’s original target is within sight.
Italian President Mattarella offered Senate leader Casellati (Forza Italia) an “exploratory mandate” to form a government nearly seven weeks after an inconclusive election led to a hung parliament.
