The optimism we saw after the report with regards to a tentative US-China “truce” was tempered yesterday, with global stock indices trading mixed as investors appear indecisive ahead of the meeting between the US and Chinese Presidents at the G20 summit. Today, ahead of the meeting, market participants may pay some attention to the Eurozone preliminary inflation data for June, as well as the US core PCE index for May.
The dollar traded lower against most of the other G10 currencies on Thursday and during the Asian morning Friday. It lost the most ground against the safe-havens CHF and JPY, while it gained only versus NOK, SEK and GBP.
Seeing in isolation, the fact that CHF and JPY were the best performing G10s suggests a risk-off trading activity. However, the risk-linked currencies AUD, NZD and CAD were also on the front foot against their US counterpart, which in our view means that investors may be indecisive ahead of the meeting between the US President Trump and his Chinese counterpart at the G20. Indeed, major EU indices were mixed, and although the US ones pointed to some optimism, Asian bourses turned south today.
It seems that the optimism we saw after the report with regards to a tentative US-China “truce” was quickly tempered, and the initial trigger may have been remarks by China’s foreign ministry spokesperson that they were not aware of any such agreement. A few hours thereafter, another report hit the wires saying that China insists that the US removes its ban on Huawei and lifts all punitive tariffs, while later in the day, White House economic adviser Larry Kudlow said that the US President agreed to no preconditions for the meeting, and that he could still proceed with additional tariffs if needed. All these raised doubts as to whether the Trump-Xi meeting could result in anything materially positive. The meeting is scheduled to take place on Saturday at 02:30 GMT.
As for our view, we still believe that the most likely outcome is some sort of agreement to pause additional tariffs and restart talks. Even if there is no material progress on outstanding differences, the two leaders may agree to put everything on the negotiating table. This would be a market friendly outcome and may allow equities and risk-linked assets to gain somewhat, while safe havens are likely to come under selling interest. The opposite may be true if the meeting ends on a negative note, as this could lead to re-escalation and the imposition of new tariffs.
The big question is what will happen with the dollar. In the recent past, the US currency has been acting as a safe haven, strengthening on escalating tensions, and weakening when the picture was brighter. However, things may be different this time. Given the Fed’s decision to lay the groundwork for lower rates, headlines suggesting that the two Presidents are willing to work things out could prove positive for the greenback, as increasing chances of a truce between the world’s two largest economies could also imply less need for aggressive easing by the Fed.
Although Euro Stoxx 50 continues to slowly drift lower from Thursday last week, the move down is not very strong, which suggests that investors are somewhat in a “stand by” mode. Technically, the index could be forming a potential flag formation, which tends to break to the upside, according to TA rules. That said, we will remain cautious and wait for a clear break through one of our key levels, before we examine a further directional move.
A break of the upper side of the potential flag formation and a strong push above the 3460 barrier, marked by the high of June 26th, could open the door for a further price acceleration, which could lead the index to the high of last week, at 3496. This is where Euro Stoxx 50 could get a hold-up, or even correct back down a bit. But, if the price continues to trade above the 3460 hurdle, the buyers might step in again and drive the index to the upside, possibly bypassing the 3496 obstacle and hitting the 3511 level, which is the high of May 3rd.
Alternatively, if the price slides again and falls below the 3430 hurdle, marked by Tuesday’s low, this might send the index further down again, aiming for the 3417 support zone. That zone marks the high of June 11th. If the sellers see it as a temporary obstacle on their way south, a break of it could lead to a test of the 3396 area, marked near the high of June 13th, which also coincides with the 200 EMA on the 4-hour chart.
Ahead of the Trump-Xi meeting, investors could pay some attention to Eurozone’s preliminary inflation data for June, as well as the US core PCE index, the Fed’s favorite inflation metric, for May.
Getting the ball rolling with the Euro-area CPIs, the headline rate is expected to have remained unchanged at 1.2% yoy, while the core one is forecast to have risen somewhat to +1.0% from +0.8%. However, bearing in mind that the German CPI for the month, released yesterday, accelerated to +1.6% yoy from 1.4%, we believe that the headline rate may rise as well. Although a positive surprise could support somewhat the euro, with both rates doubtful to come decently close to the ECB’s objective of ““below, but close to, 2%”, we believe that market expectations around the ECB’s future plans are unlikely to change much. Following ECB President Draghi’s remarks last week over additional stimulus, market participants have brought forth their cut expectations, with a 10bps decrease in the deposit rate almost fully priced in for September.
Now, passing the ball to the US core PCE index, expectations are for the yoy rate to have held steady at +1.6%. Nevertheless, bearing in mind that the core CPI rate for the month ticked down, we see the risks as tilted slightly to the downside. In any case, even if the PCE rate rises somewhat, as long as it stays below the Fed’s inflation aim of 2%, we doubt that it could prompt market participants to price out a July rate cut. According to the Fed funds futures, apart from July, investors anticipate another cut in September, while a third one is almost fully priced in for December.
A positive surprise in the Euro-area inflation data combined with an unchanged, or a slightly lower, PCE index may allow EUR/USD to trade somewhat higher. However, any potential recovery could stay short-lived and limited in case Trump and Xi agree to reinitiate negotiations in order to resolve their trade dispute. As we already noted, such an outcome could benefit the US currency, as it could lessen the likelihood for aggressive cuts by the Fed, and thereby push EUR/USD lower.
After touching the area slightly above the 1.1400 barrier, at 1.1413, EUR/USD has moved back down and met its strong support near the 1.1345 zone. Even though the rate rebounded from that area, the bulls didn’t have enough steam to push it above the 20 SMA of the Bollinger bands. For now, we will stay somewhat neutral, but we will monitor the 1.1345 support area carefully, as a break of it could lead to deep slide.
A drop below the 1.1345 hurdle, which is marked near the highs of June 7th and 12th, and also near the low of June 25th, could send EUR/USD further down, possibly aiming for the 1.1317 obstacle. That obstacle, previously, acted as a good resistance on June 20th, but this time it may take the opposite role, becoming a good support. If the rate rebounds from there, but it stays below a short-term tentative downside resistance line taken from this week’s high, we will continue targeting lower areas. If the pair moves below the previously-mentioned 1.1317 hurdle, this might clear the path to the 1.1283 level, marked by the low of June 21st.
On the upside, if the aforementioned downside line breaks and the rate climbs above the 1.1392 barrier, marked by Wednesday’s high, this could increase the pair’s chances to drift further north. This could lead EUR/USD to a possible test of this week’s high, at 1.1413, where the rate could stall for a bit. But if the buyers are feeling confident, a break of that obstacle could invite even more bulls into the field and EUR/USD might get lifted to the 1.1449 level, marked by the highest point of March.
During the European session, apart from Eurozone’s CPIs, we also have the final UK GDP for Q1. Expectations are for the final print to confirm its preliminary estimate, namely, that the UK economy accelerated to +0.5% qoq in the three months of 2019, from +0.2% in Q4. Nonetheless, we already had data pointing to how the economy has performed during Q2, and the picture was not so bright. The economy shrank 0.4% mom in April, with the NIESR projecting a 0.2% contraction for the whole quarter. Even the BoE revised lower its projection for Q2, to 0.0% from 0.2% previously.
In the US, alongside the core PCE index for May, we get personal income and spending data of the month. The income rate is expected to have declined to +0.3% mom from +0.5%, but bearing in mind that the average hourly earnings monthly rate for May held steady, we see the risks surrounding the income forecast as tilted somewhat to the upside. Spending is expected to have picked up some steam, accelerating to +0.5% mom from +0.3%, something supported by the retail sales for the month, which also accelerated.
From Canada, we have the monthly GDP for April, which is expected to have slowed to +0.2% mom from +0.5% in March. Coming on top of the slowdown in retail sales for the month, this would not be pleasant news for BoC policymakers. However, taking into account the strong acceleration in the CPIs for May and the better-than-expected employment report for the month, we doubt that officials will be tempted to turn their eyes to the cut button when they meet next, on July 10th. They may repeat that the degree of accommodations provided by the current rate remains appropriate and that they will remain data dependent in taking future decision.
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