Rates: Side-lined ahead of next week’s key US eco data
The ECB wants to spend time finding out whether the recent setback in EMU eco data is temporary. It suggests that markets will be more sensitive to eco numbers as well. Draghi’s overall message shouldn’t have a permanent impact though. We expect a neutral session today, with especially US investors side-lined ahead of next week’s key data and Fed meeting.
Currencies: Will US data be strong enough to confirm EUR/USD 1.2155 break?
EUR/USD dropped below the 1.2155 range bottom yesterday. Draghi kept a wait-and-see approach. Combined with underlying USD strength, this was apparently enough for some stale euro longs to throw the towel. From here, the focus returns the US side of the story. Will upcoming US data be strong enough to support a further rise in US yields and the USD?
The Sunrise Headlines
- US stock markets eked out gains of 1% with Nasdaq outperforming (+1.64%) following strong tech earnings (eg Facebook, Amazon, Microsoft). Asian equity indices gain less ground with China again underperforming.
- The BoJ left its stimulus program unchanged, while removing language from its statement declaring that it would reach 2% inflation around fiscal 2019. The Japanese yen remains remarkably strong. (BB)
- North Korean leader Kim Jun Un met with South Korean President Moon Jae-in. Their meeting is set to determine the future of relations on the Korean Peninsula and lay the groundwork for the US/North Korean Summit. (WSJ)
- China is open to negotiating with the US to resolve trade tensions, Premier Li Keqiang was quoted as saying by state media, noting that the countries should manage their conflicts through dialogue. (Reuters)
- Both headline (0.5% Y/Y) and core (0.6% Y/Y) Tokyo CPI printed significantly below consensus in April. March retail sales (-0.7% M/M) fell short of forecast as well, while industrial production (1.2% M/M) did manage to beat the bar.
- Profit growth at Chinese industrial firms slowed to its weakest pace in over a year in March, in a sign of increasing headwinds for the Chines economy as policy makers navigate debt risks and a heated trade row with the US. (Reuters)
- Today’s eco calendar contains German labour market data, EZ economic confidence and Q1 GDP readings in the UK and the US. BoE Carney is scheduled to speak. Italy sells bonds
Currencies: Will US Data Be Strong Enough To Confirm EUR/USD 1.2155 Break?
US data strong enough to confirm 1.2155 break?
The rise of core/US yields and of the dollar slowed yesterday ahead of the ECB’s policy decision. The ECB left policy unchanged and Draghi didn’t give new info on a future change in policy. First tests of 1.2155 support before and during the press conference failed. Later, the break finally succeeded. The constructive underlying USD momentum was the main driver. The lack of new guidance on ECB normalization probably discouraged euro longs. EUR/USD was already on a down trajectory. The topside in the likes of EUR/GBP and EUR/JPY was blocked. More euro longs finally threw the towel. EUR/USD closed the session at 1.2103. USD/JPY finished the day little changed at 109.30. EUR/JPY finished at 132.30 (from 133.07).
Asian equities mostly show modest gains overnight supported by good results from several technology bellwethers, including Amazon. The underperformance of Chinese stocks is again striking. The BOJ maintains its policy stimulation, as expected, but changed its language on inflation. It removed the assessment for inflation to reach 2% around fiscal year 2019. For now, the impact on the yen is close to non-existent. USD/JPY trades in the 109.15 area. EUR/USD hovers in the low 1.21 area.
The eco calendar heats up today with the EC confidence data, Q1 growth figures in France, Spain and Belgium and German labour data. The key data feature is the US advance Q1 GDP report. A modest 2.0% Q/Qa is expected. So, the bar of consensus is not that high. We keep also a close eye at the price series of the report. The core PCE deflator is expected to rise from 1.9% to 2.5%! Quarterly growth data are always a bit backward looking. In this respect, we assume that next week’s US early month data are more important for the fate of the dollar. However, a constructive report might support further USD gains. From a technical point of view, we look for confirmation of yesterday’s break below 1.2155. If confirmed, next support comes in at 1.2055 (50% retracement) and the 1.1936/16 area (62 % retracement/jan 2018 low).
EUR/GBP dropped from the mid 0.87 area to fill bids north of 0.8680 yesterday. We see the move mainly as euro softness. UK Q1 GDP is expected at a soft 0.3% Q/Q and 1.4% Y/Y today. BoE Carney and Haldane speak. We don’t expect any high profile news for sterling. However, market expectations are already low. Further euro (EUR/USD) weakness might still filter through in the EUR/GBP momentum.
EUR/USD rebound to slow?
