EUR/USD dropped below the 1.17 barrier

Markets

• Yesterday, global bonds were supported by a risk-off sentiment. Geopolitics (US-China trade talks, North-Korea) weighed. The crisis of the Turkish Lira, uncertainty on the policy of a new populist government in Italy and disappointing EMU PMI's also supported safe US/core European bonds. The Minutes of the May Fed meeting added to the bond friendly sentiment, but for a different reason. The Fed confirmed its intention of gradual rate hikes. A June hike is highly likely. At the same time, the Fed repeated that a small overshoot in the 2% target remains consistent with its symmetrical inflation objective. The debate on two or three additional rate hikes later this year remains open. The ‘soft' Fed minutes further supported US Treasuries. At the same time, it caused a (temporary) relief rally of US equities. In a daily perspective, US yields declined between 4 bp (2-y) and 6.6 bp (10-y). The 10-y US yield dropped below the 3.0% mark. Intraday, the US curve showed some tentative steepening after the publication of the minutes. German yields declined up to 5 bp, with the belly of the curve outperforming, due to poor EMU data and lingering uncertainty on Italy. Intra-EMU spreads widened up to 13 bp with Italy underperforming. Today, the eco calendar contains the details of the German Q1 GDP. In the US, the jobless claims and housing data will be published. However, the focus for bond trading will probably remain on (geo) political issues and on Central Bank communication. The Trump administration investigating the need for import tariffs on cars might be a negative for risky assets. Markets will also closely monitor the activities of Giuseppe Conte as he tries to form a new Italian government. From a central bank point of view, the Minutes from the April ECB meeting and comments from ECB and Fed speakers also deserve investors' attention. Yesterday's price action in US Treasuries suggests that the recent rise in US yields might take a breather. A further rise of the 10-yield north of 3.0% remains possible, but such a move probably needs confirmation on the strength of the US economy and a further protracted rise in inflation. This might take some time. On the German yield curve we look out whether the German 10-y yield will manage to stay above the 0.47%/0.50% support area. For now, we maintain the view that a sustained break won't be evident. However, the pressure is building and a break would be highly significant from a technical point of view.

• The risk-off trade combined with disappointing EMU data weighed on the euro. EUR/USD dropped (temporary?) below the 1.17 barrier. The yen outperformed. USD/JPY dropped below 110 and EUR/JPY fell below the 129 support area. Today, global risk sentiment, CB speak and the political developments in Italy will probably remain the main drivers from FX trading. The combination of a risk-off sentiment (trade tension) and ‘soft' Fed minutes weighs on USD/JPY. This trend might continue. As long as uncertainty on Italy persists, EUR/JPY and EUR/USD will probably also struggle to prevent further gains. For now, we don't preposition for a change in corrective euro downtrend.

• Yesterday, UK CPI data were reported softer than expected (2.4% Y/Y headline, 2.1% core). The report further reduced expectations for an August rate hike and weighed on sterling. Today, the UK retails will be published and investors will also keep an eye at the BoE market forum. Retail sales probably will have to be very strong to trigger a meaning full rebound of sterling. If not, sterling softness and euro weakness might keep each other in balance.

News Headlines

• An emergency rate hike by the Turkish central bank halted the slide of the lira (for now). The currency gained about 7% immediately after one of the central bank's key lending rates increased from 13.5% to 16.5%.

• The Trump administration initiated a national security investigation into automotive imports. It could clear the way for tariffs on cars from Europe, Japan and South Korea and lead to an escalation of global trade tensions. (FT)

• Giuseppe Conte has been given a mandate by Italian president Mattarella to become the country's next PM. In a next step, Conte has to return to Mattarella with an acceptable list of ministers to fill the key cabinet posts.

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