EUR/USD finally exited its narrow 1.2282-1.2345 4-day trading range

Markets

• Core bonds lost ground yesterday with US Treasuries underperforming German Bunds. The latter still had some catching up to do following the long Easter weekend. The slide in core bonds started as European stock markets bottomed around European noon and accelerated as WS recovered from Monday's beating. EMU and US eco calendars were empty, but strong US car sales drew some attention. The US administration published a detailed list of Chinese products (1300) which will be subject to import tariffs totaling about $50bn. It didn't stop the comeback of US stock markets as it was widely anticipated. China threatened with new retaliatory measures overnight, but remained very vague. Washington-Fed based governor Brainard repeated her call for further gradual rate hikes to counter easy fiscal policy. At the end of the day, the US yield curve bear steepened with yields 3.1 bps (2-yr) to 4.9 bps (30-yr) higher. Changes on the German curve ranged between +0.9 bps (5-yr) and -0.2 bps (30-yr). 10-yr yield spreads vs Germany widened marginally with Greece outperforming (-7 bps).

• EUR/USD finally exited its narrow 1.2282-1.2345 4-day trading range. The dollar gained on points against the euro, but the move remained rather meagre given rising interest rate differentials in favour of the greenback. The pair closed the session at 1.2270 and remains unnerved by latest developments in the US/Chinese trade war. USD/JPY staged a bigger recovery (106.61 close) given the improvement in risk sentiment, but the move remains technically insignificant. A return above the 108-area is necessary to upgrade the picture. EUR/GBP declined from 0.8759 to 0.8728 on the back of a strong(er than feared) UK manufacturing PMI (55.1 from 55.0) and the better risk climate.

• Asian stock markets, apart from South Korea, trade positive overnight despite the Chinese trade warning and disappointing Japanese/Chinese PMI's. The US Note future, USD/JPY and EUR/USD move directionless, providing no strong signal for the start of European dealings. The eco calendar becomes interesting on both sides of the Atlantic with first EMU CPI's and next US ADP employment and non-manufacturing ISM. Consensus expects EMU headline inflation to rise from 1.2% Y/Y to 1.4% Y/Y in March, with the core CPI picking up from 1% Y/Y to 1.1% Y/Y (related to this year's earlier timing of Easter?). National data released last week suggests mild downside risks to the headline reading, but focus will be on the core measure. We think that (especially bond) markets will only react in case of an upward surprise given that the likely Easter boost could already be reversed next month. The US ADP employment report is expected to reflect ongoing strength (+210k) on the US labour market. The US non-manufacturing ISM is forecasted to ease from 59.5 to 59 in February, which remains a very lofty level. Such stabilization would be similar to the one recorded in the manufacturing ISM earlier this week and goes against the global flow of bigger setbacks in PMI's/ISM's (thanks to tax reforms?!). Continued outperformance on the data front could weigh on US Treasuries, underperforming German Bunds going into Friday's payrolls. It would tilt the balance further in favour of the dollar on FX markets, especially if yesterday's improvement in risk sentiment lasts. Sterling traditionally is another beneficiary of stronger bourses. Key support around 0.8668/0.87 comes back in sight. We hold our view that a break will be difficult without accord on the Irish border in brexit talks, even if the BoE continues hiking rates.

News Headlines

• The Federal Reserve Bank of New York said that SF Fed Williams, will become its next leader, assuming one of the top leadership positions at the US central bank and asserting a continuation of Fed policy.

• The US proposed imposing 25% tariffs on about $50bn worth of Chinese-made products, focusing on high-tech items from semiconductors to lithium batteries. China condemned the move and said it will respond on an equal scale against US products.

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