Currencies: Euro Prone For A PMI-Driven Hit

Fundamental analysis of Forex market
  • Rates: Room for some short term profit taking?
    The US 10-yr yield is intensively testing 2.01% support. Failure to break below this level today could pave the way for some short term profit taking on US Treasuries. The German 10-yr yield is near all-time lows. EMU PMI’s are expected to remain soft. Failure to gain on the data would suggest that sufficient bad news is discounted and could also trigger a counter move.
  • Currencies: Euro prone for a PMI-driven hit
    USD follow-through selling drove EUR/USD near the 1.13-handle yesterday. Today’s EMU PMI’s might turn the tide for the euro however. A disappointment will strengthen Draghi’s case for more policy easing. EUR/USD 1.1250 is a first intermediate support and could test our buy on dips hypothesis.

The Sunrise Headlines

  • US equities closed up to 1% higher in the wake of the FOMC meeting with new all-time highs for the S&P 500 and Dow Jones. Asian markets trade slightly under water (dollar weakness?) with China outperforming.
  • Boris Johnson and Jeremy Hunt go head-to-head in the Tory leadership election after Michael Gove was narrowly eliminated in the final voting round. The conservative party’s 160k grassroots members can now cast their votes.
  • US President Trump toned down his comments against Iran only one day after blaming the country for making a big mistake. He now finds it hard to believe that Tehran intentionally shot down a US Navy surveillance drone.
  • The Xinhua News Agency said that Chinese President Xi Jingping on a visit to Pyongyang said that he wanted to play a positive and constructive role towards achieving denuclearization of the Korean Peninsula.
  • EU leaders concluded that none of big three alliances’ lead candidates (Weber, Timmermans, Vestager) would receive sufficient backing to follow EC leader Juncker. Talks continue next week in the sidelines of the G-20 meeting.
  • EMU consumer confidence fell from -6.5 to -7.2 in June undershooting forecasts of a stabilization. The Japanese manufacturing PMI this morning remained in contraction territory, falling from 49.8 to 49.5.
  • Today’s eco contains first readings of EMU manufacturing and services PMI numbers. Fed Brainard, Mester and Daly are first to speak after this week’s FOMC meeting.

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Currencies: Euro Prone For A PMI-Driven Hit

Euro prone for a PMI-driven hit

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The dollar was subject to follow-through selling yesterday. Markets chewed over the Fed’s dovish policy meeting yesterday and what it means for interest rates going forward. A hideous Philly Fed business outlook and an almost 4% increase in oil prices also weighed the dollar down. EUR/USD pierced through 1.13 but closed the session eventually slightly below (1.1293) as the dollar marginally profited from rising geopolitical tensions. USD/JPY slid from 108.10 to 107.30.

While Wall Street printed new record highs (S&P500, Dow) yesterday, Asia is trading more mixed. China outperforms as markets have set their hopes on a meeting between Trump and Xi at the G20 summit end of June. Japan underperforms and a glance at USD/JPY reveals why. The yen is trading at the strongest level since April 2018 (excluding January’s flash crash). The NY Times reported president Trump approved strikes against Iran. He later cancelled the operation however. The couple is eying first support at around 106.92 (107.10 currently).

ECB’s Draghi hinted at further monetary easing earlier this week if the economic skies do not clear up soon. Today’s EMU PMI confidence indicators therefore will be scrutinized. Markets expect a stabilization near/a marginal increase of current levels. Given the ongoing trade uncertainty and geopolitical tensions we see little reasons to expect a surprise on the upside, rather the opposite. If so EUR/USD is prone for a setback after yesterday’s rise. First support situates around 1.1250.

Draghi signalled further ECB easing earlier this week if the eco outlook deteriorates further. The Fed’s freshly installed easing bias at least restored the balance of softness. We now see an asymmetrical reaction function for both the dollar and the euro, with them being particularly sensitive to negative news. The pair probably entered a buy-on-dips pattern. Support at EUR/USD 1.1180/1.1107 still looks solid.

The Bank of England held rates stable and kept its tightening bias alive yesterday. It still assumes an orderly Brexit but the likelihood of a no deal increased. Sterling lost in the wake of the meeting before recovering (to about EUR/GBP 0.89) after some political fog cleared. Johnson and Hunt came out as yesterday’s finalists of the Tory leadership race. A outcome is expected end of July. Up until then we expect trading in EUR/GBP mainly to be technical driven around its new-found equilibrium in the 0.89’s.

EUR/USD settling back in the 1.13 area might prove to be shortlived after today’s PMI’s.

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