Rates: US 10-yr yield returns north of 3%
Core bonds lost ground yesterday with German Bunds underperforming. Inflation expectations rise further. The US 10-yr yield trades back above 3%. Attracted by key resistance at 3.07%, we think the sell-off could continue against the back of strong expected US eco data and probably relatively hawkish Fed comments.
Currencies: Will US retail sales be strong enough to revive USD rebound?
EUR/USD rebounded close to 1.20 yesterday, but the test was rejected. The focus turns to the US April retail sales today. After last week’s ‘soft’ US CPI, a good report is probably needed to keep the USD rally alive. For now, geopolitical tensions apparently are supporting the dollar more than the euro. Sterling traders will keep a close eye at the UK wage growth data.
The Sunrise Headlines
- US stock markets opened strong, but trimmed gains as US rates and the dollar were upwardly oriented during US dealings. Asian bourses face some selling pressure this morning with India outperforming.
- The US and China are “still very far apart” on disputes over trade, technology, and market access, the US ambassador to China said, managing expectations ahead of a visit to Washington by a senior Chinese envoy. (FT)
- China reported weaker-than-expected investment (7% Y/Y) and retail sales (9.4% Y/Y) in April and a drop in home sales, clouding its economic outlook. Industrial production (7% Y/Y) was this morning’s bright spot. (Reuters)
- The IMF has sounded a fresh warning about Ireland’s surging property market, saying residential prices appear “modestly overvalued” by some measures. They also called for “close attention” to the upswing in Irish commercial property. (FT)
- Turkish President Erdogan said he intends to tighten his grip on the economy and take more responsibility for monetary policy if he wins an election next month. EUR/TRY set a new all-time high above 5.20. (BB)
- The EU warned Britain time was running out to seal a Brexit deal this autumn and ensure London does not crash out of the bloc next March, adding to pressure on PM May. (Reuters)
- Today’s eco calendar contains US retail sales, Empire manufacturing, the UK labour market report, German ZEW-survey, 2nd reading of Q1 EMU GDP and several Fed speakers.ay’s eco calendar contains US retail sales, Empire manufacturing, the UK labour market report, German ZEW-survey, 2nd reading of Q1 EMU GDP and several Fed speakers.
Currencies: Will US Retail Sales Be Strong Enough To Revive USD Rebound?
Will US retail sales revive USD rebound?
The USD decline since last week’s US CPI initially continued yesterday. The trade-weighted dollar drifted south. Some euro strength was also in play. ECB‘s Villeroy indicated that APP will probably halt this year and it won’t take ‘years’ for the ECB to raise rates after APP. LT interest rate differentials narrowed in favour of the euro. EUR/USD came close to the 1.20 area, but the rally ran into resistance and gains couldn’t be sustained. The pair even closed the day with a small loss at 1.1926. At the same time USD/JPY remained well bid (close at 109.66). So, in the end, the dollar showed quite resilient despite some intraday gyrations.
Asian equities mostly trade with modest losses overnight. The oil price continues to push higher with Brent above $78/barrel. The US 10-y yield regained the 3.0% barrier. Geopolitical tensions in the Middle East and higher US yields for now tilt the balance again in favour of the dollar. USD/JPY is nearing the 110 mark. EUR/USD also trades with a slightly negative bias (1.1920 area).
Today, the EMU and German Q1 GDP and German ZEW sentiment will be published. Yesterday’s price action shows that the euro is not immune for EMU news. However, the focus for FX trading will probably turn to the US retail sales. Last week’s ‘soft’ US CPI suggests that negative news might make the market more cautious on the scenario of four Fed rate hikes this year. So, the USD probably at least needs an in-line outcome to resume its recent rebound. At the same time, the USD shows good resilience given the rise in the oil price. We also have the impression that the USD profits more from (geopolitical) uncertainty than the euro. Yesterday, we indicated that we didn’t see a trigger for a big USD decline yet. We hold on to that view even as multiple conflicting factors are in play. Yesterday’s rejected test of EUR/USD 1.20 and the solid rise in USD/JPY might give USD bulls some comfort. The 1.1823 correction low is the first reference in EUR/USD ahead of 1.1718.
UK labour data will be released today and the government will again meet on Brexit. UK job growth is expected solid and earnings (ex-bonus) are expected to rise to 2.9% Y/Y. Meeting the consensus could lift the probability of an August rate hike again. After last week’s BoE decision, the EUR/GBP rebound halted near 0.8850. Some modest sterling gains are possible in case of a decent labour report. However, we don’t expect a sustained GBP rally yet.
EUR/USD rebound blocked near 1.20. Focus turns to US retail sales
