Currencies: Euro Fails To Maintain Gains Despite Risk-On. Focus Turns To The Fed

• Rates: Will improvement in risk sentiment last?
  Bouncing oil prices, narrowing peripheral spreads and rallying stock markets weighed on core bonds yesterday. Improved risk environment hit a snag overnight as US President Trump upped the ante ahead of his meeting with Chinese president Xi Jinping. Risk sentiment is still key for trading. US Consumer confidence and a speech by Fed vice-chair Clarida are wildcards.
• Currencies: Euro fails to maintain gains despite risk-on. Focus turns to the Fed
  EUR/USD couldn’t maintain initial gains yesterday even as sentiment on risk improved and as Italy and the EU try to solve the impasse on the Italian budget. Today, the focus is on the US data and on Fed speeches. If Fed speakers turn more conditional on further rate hikes, the dollar might lose some ground.

The Sunrise Headlines

• US equity markets marked substantial gains yesterday as risk sentiment improved. Nasdaq (+2%) outperformed. Most Asian stocks are trading in green this morning, with Chinese indices suffering on fading hopes on a US-China deal.
• US President Trump took a pessimistic tone about the meeting with China’s president Xi Jinping later this week at the G20 summit, saying it is likely he will go through with the 25% tariffs on $200bn of Chinese goods if negotiations fail
• US President Trump criticized the Brexit deal, saying it is only a great deal for the EU. He says it is damaging the UK’s ability to trade with the US and urged the UK to renegotiate with the EU, something both parties signalled is not an option.
• Ukraine’s parliament approved President Poroshenko’s call for a 30-day period of martial law after Russia captured three Ukrainian naval ships in a disputed region of the Black sea. Many countries already expressed Ukraine their support.
• UK PM May has challenged opposition and Labour leader Jeremy Corbyn to a televised debate about Brexit. She wants to explain why this deal is the right deal for the UK. The provisional date is currently December 9, a Sunday night.
• Italian PM Conte and his deputies, Salvini and Di Maio, confirmed they will stick to the main 2019 budget goals for now as they await a full cost analysis next year’s spending measures. The deficit target might be lowered though.
• Today’s economic calendar contains US Consumer Confidence. Fed Vice Chair Clarida and regional governors Bostic, Evans and George speak. ECB Nouy, Mersch and Costa feature as well. The US Treasury continues its refinancing

Currencies: Euro Fails To Maintain Gains Despite Risk-On. Focus Turns To The Fed

Euro disappoints. Fed speakers in focus

The euro showed a diffuse picture yesterday. Early in the session, the euro profited from headlines that Italy and the EU tried to reach an agreement on the Italian budget. A positive risk sentiment was supportive too. However EUR/USD gains couldn’t be maintained. German IFO sentiment confirmed Friday’s poor November PMI. In his testimony before the EU Parliament, ECB’s Draghi acknowledged recent weaker data but kept the view that part of the EMU slowdown was due to temporary factors. Still, EUR/USD reversed earlier gains, closing at 1.1328 (from 1.1337 on Friday). USD/JPY profited from the risk rally closing 113.58 (from 112.96). In the end, the USD held up well in a risk-on context. Overnight, US president Trump indicated that a trade deal with China remains difficult and that higher import tariffs are likely to be imposed. The reaction in Asia is modest. Japan outperforms on a weak yen (USD/JPY holding in the mid 113 area). China underperforms, but losses are modest. EUR/USD shows no clear trend (1.1335 area). There are no data in EMU today. In the US, house prices and consumer confidence will be published. Consumer confidence is expected to come off cycle peak levels reached last month. However, the focus of (FX) markets will probably be on Fed speakers including Vice Chair Clarida. We expect him to hold a balanced tone. If he elaborates on recent developments, markets might focus on the dovish elements. Overall, the USD data and the Fed speak might be a tentative USD negative, but the reaction might be guarded ahead of Powell’s speech tomorrow. Recently we had a neutral bias on EUR/USD. The pair is holding a sideways range between 1.1216 and 1.1621. ST, a further EUR/USD decline/rise of the dollar might be less evident. A better risk sentiment in theory is euro supportive. Fed comments might be slightly less USD supportive. So, the EUR/USD might become better protected. Admittedly, yesterday’s price action was slightly disappointing for euro bulls.

Sterling show no clear trend yesterday. On Sunday, UK PM May overcame a symbolic hurdle formally reaching a Brexit deal with the EU. However, the approval in the UK remains a binary risk. EUR/GBP closed the session marginally lower at 0.8842. Today, the CBI retail data will be published, but markets remain focused on PM May’s campaign to promote her Brexit deal. EUR/GBP will probably remain in a some kind of erratic trading patter near current levels as long as uncertainty on the approval remains as high as it is right now

EUR/USD: euro fails to maintain gains even as sentiment on risk improves