Dollar initially maintained a positive momentum

KBC Market Research Desk KBC Bank

Markets

Yesterday, the US 10-y yield testing the psychological barrier of 3.0% was the key feature for global bond trading. The outcome of the this market battle was also important for other markets. EMU confidence data, including the German IFO business survey, were again soft, but didn’t improve bond sentiment in a profound way. Selling reaccelerated in US dealings. It even looked that a stronger than expected US consumer confidence and US new home sales would be able to force the 10-y yield break. The 3.0% level flashed on the screens, but the test was rejected. The rise in (US) yields (and other, corporate related issues) finally triggered a setback on the equity markets. This equity correction counterbalanced/blocked the upward momentum in core yields. In a daily perspective, the US yield curve bear steepened, with the 10 and 30-yield rising 4bp +. The US 10-y closed at 2.9995!. German yields finished the day little changed, even marginally lower.
Today, the US and EMU eco calendar is almost empty. This won’t prevent the battle for key US yield levels to continue. Asian equities show modest losses. A further stock market correction might slow the rise in core bond yields. However, a test/ break of the key resistance in the US 10-yr (3.05%/3.07%) and 30-yr yield (3.22%) might still be on the cards if upcoming US eco data remain solid. The German 10-yr yield bounced off key support levels (0.46%/0.48%), consolidating since the end of March. Last week’s move suggests the start of a new upleg, but the approaching ECB meeting is a hampering factor short term.
Yesterday, the dollar initially maintained a positive momentum. USD/JPY jumped temporary north of 109 and EUR/USD set a minor new correction low below 1.22. However, the dollar rally was blocked later in the session as the rise in US yields eased and as sentiment turned risk-off. Even so, the correction of the US currency remained modest. This morning, the dollar is holding within reach of the recent peaks against most majors. A correction on the equity market markets might make the picture a bit murky for the dollar. However, we have the impression that the dollar maintains the benefit of the doubt. The EUR/USD 1.2155 rang bottom is again on the radar. The trade-weighted USD (DXY) is close to a comparable level (91 range top). A break would improve the ST picture of the USD.
Yesterday, EUR/GBP continued the consolidation pattern in the mid 0.87 area. UK eco data (Budget data and CBI order data) were mixed and had little impact on sterling. Sterling held off the recent lows despite ongoing noise on Brexit and despite reduced market expectations on a BoE rate hike. Today, there are no important eco data in the UK. So global sentiment and Brexit headlines (debate on the customs union) will again set the tone for sterling trading. For now, the EUR/GBP 0.88 resistance looks quite solid short term.

News Headlines

US equity indices turned south after a positive open. Higher bond yields and uncertainty on the outlook for corporate earnings after strong Q1 earnings weighed on equities. The Dow Jones and the Nasdaq closed the session 1.70% lower. Asians equities are also trading in negative territory, but losses are more modest than in the US.
U.S. President Trump indicated that a new NAFTA agreement could reached in the near future. Foreign trade Ministers from Canada, the US and Mexico met in Washington. Especially the progress made on the key issue of automobile production looks promising.
Today, the eco calendar in the US and European only contains second tier data releases. The earnings season is in full swing with, amongst many others, Boeing, Twitter, Visa, AT&T and Facebook reporting results. Markets will also look forward to tomorrow’s ECB policy meeting/press conference.

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KBC Market Research Desk

KBC Bank

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