The price action this week confirms the USD being captured in a sell-on-upticks pattern

Markets

Lacking guidance from US markets (closed for Juneteenth) and with hardly any EMU data scheduled for release, the EMU yield curve showed some modest bear steepening (German 2‐y unchanged, 30‐y +2.8 bps). The Fed decision on Wednesday maybe served as a reminder that overall uncertainty/low visibility is a reason for markets not to front‐ turn on a softer CB tilt. Basically, that was also the message from the BoE policy decision. The BOE left its policy rate unchanged (4.25%). The BoE acknowledging a softer labour market is supporting the case for the MPC to continue reducing policy restriction a quarterly pace (next step in August). Even so, considering recent bumpy inflation path, the MPC reiterates that policy has to remain restrictive for now and that ‘a gradual and careful approach to the further withdrawal of monetary policy restraint remained appropriate’. UK yields regained a few bps. Money markets trade in line with the BOE reducing the policy rate by a cumulative 50 bps by year end. Sterling regained modest ground against the euro (close 0.854) but the overall picture didn’t change. In technical trading EUR/USD hovered in the upper half of the 1.14 big figure (close 1.1495). The Eurostoxx 50 lost 1.33%, mainly on geopolitical uncertainty.   

This morning, the market focus turns again to the war between Israel and Iran and the potential involvement of the US. President Trump indicates that he will decide within two weeks. Asian equity markets show some modest relieve, but in essence, this also suggests that this additional layer of uncertainty might be here to stay for some time to come. With the tariff deadline on July 9 and the US budget approval target near July 4, early July will become very crowded for the US administration to decide on several key topics. In the meantime, markets might still be haunted by ‘back‐and‐forth noise’ as those deadlines are coming closer. This might also be the case today, with only second tier data on the agenda in Europe and the US. US yields show no clear tend this morning. DXY eases to 98.65. EUR/USD regains the 1.15 barrier (1.152). Recent oil‐driven USD outperformance apparently is losing momentum as oil eases slightly this morning on the potential two‐week decision period. The price action this week confirms the USD being captured in a sell‐on‐upticks pattern. Last week’s EUR/USD top (1.1631) remains the first technical reference. At the time of finishing this report, UK May retail sales are reported to have declined much more than expected (‐2.7% M/M and ‐1.3% Y/Y). Sterling feels some renewed headwind with EUR/GBP heading toward 0.8545.  

News and views

Japanese inflation in May slowed from 3.6% to 3.5% on a headline level. But the underlying gauge quickened again and more than expected with the Bank of Japan’s preferred gauge (ex. food) rising to 3.7%. Excluding the two readings in December 2022 and January 2023 that came during the post‐pandemic surge, it is the highest print since the early eighties. CPI ex food and energy prices accelerated from 3% to 3.3%. Adding rising services price inflation to 1.4% on solid wage growth means that central bank confidence in inflation sustainably returning to the 2% target will surely strengthen. The BoJ left the policy rate unchanged earlier this week amid lingering (trade) uncertainty but minutes released this morning showed that Tokyo will hike if the economic (and inflation) outlook is met. That appears to be the case for now. We believe Japanese money markets are underestimating the probability of higher policy rates later this year with BoJ officials for the time being purposely being guarded in their communication. A hike in December this year is given only a 50% chance and that barely changed after this morning’s numbers. JPY reacted stoic as a result near USD/JPY 145.3.

In a draft EU statement seen by the Financial Times that’s circulating ahead of an EU leader summit June 26‐27, France has lobbied EU countries into pledging additional measures that may raise the euro’s profile as a global reserve currency. The statement asks the bloc’s institutions including the ECB “to explore actions to reinforce the international role of the euro” now that of the dollar appears to be waning. The FT cited people familiar with Paris’ thinking that investors are looking for a safe haven from US Treasury debt and so, for one, the EU should issue more joint debt. IMF’s Georgieva concurred on Thursday, calling it “not by chance” that investors looking for quality safe assets are now parking so much in gold these days. The call to action was reinforced by ECB Lagarde’s “global euro moment” speech end May. ECB chief economist Lane earlier this month said that joint bonds are one way to respond to an “undersupply of safe assets” but also cited a Blanchard paper that proposes replacing a proportion of national European government bonds with Eurobonds.

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