Fundamental Analysis

EUR/USD Trying to Extend Bottoming Out

EUR/USD Trying to Extend Bottoming Out

U.S. Treasuries and German bunds parted ways Friday after a combined 10 basis point rise the day before. U.S. yields still rose between 1.3and 4.8 basis points, with the belly underperforming. They easily overcame a setback in the early hours of U.S. trading when Fed Chairman Powell said credit stress could limit the need for new rate hikes. That threw a spotlight on a growing split in the FOMC. Several other Fed governors last week were far less convinced by the idea of such a pause. This also contrasts with the ECB chairman, who on Sunday called for more rate hikes: “We are not done, we are not taking a pause, based on the information I have today.” German interest rates entered the weekend down 0.5to 2.9 basis points. The chart data presented too much of a challenge for the 10-year bond (resistance 2.5%). This was also true for equities.

The S&P500 tested the February high – before the SVB collapse – but could not overcome it. European stocks closed in the green nonetheless, with the EuroStoxx50 making an attempt to reach the important resistance at 4415. This is the post-pandemic recovery and multi-year high from November 2021. The dollar took a breather after its earlier rise. EUR/USD recovered from a low of 1.076 to 1.0805. The DXY (trade-weighted dollar) eased from the highest level since mid-March (103.58) to 103.2. Sterling consolidated near the highest level since December last year. EUR/GBP settled in the upper range of 0.86.

Asian stocks trade mostly in the green this morning with some minor outperformance in China. News flow is limited and that’s unlikely to change later today. Except from the European Commission’s consumer confidence, the eco calendar is empty. There are, however, a series of ECB and Fed speeches scheduled. They serve as a wildcard for trading. The same goes for the debt ceiling story. There were conflicting messages last week. There was hope talks could land this weekend but so far there’s no breakthrough. President Biden said talks with McCarthy went well and he will continue them today.

Core bonds trade a tad stronger this morning. We expect some consolidation near the recent highs ahead of tomorrow’s May PMIs. EUR/USD is trying to extend its bottoming out. The pair is moving a little higher north of 1.08. Sterling keenly awaits those same PMIs as well as Wednesday’s CPI data. The Bank of England is awaiting evidence of more stubborn (services) inflation before hiking further. That leaves the pound vulnerable to a downside surprise in the data.

S&P rating agency on Friday affirmed the credit rating of Slovakia at A+. At the same time it raised the outlook from negative to stable. According to S&P, the country has successfully reduced its exposure to Russian hydrocarbon imports and the economy has proved resilient to the effects of the war between Russia and Ukraine. Inflation has remained high and the budget deficit will decline only gradually over the next few years from 5.5% this year.

Government measures to support households and businesses increased this year’s government deficit. According to S&P, the political turbulence causes greater uncertainty. However, the rating agency expects that anchors for fiscal and economic policies remain intact. S&P expects 1.2% growth this year and 2.0% growth next year. It expects to government deficit to narrow to 3.6% of GDP by 2026. The net general government debt is expected hovering below 50% of GDP through 2025.

The ruling conservative New Democracy came out as victor in the parliamentary elections in Greece this weekend. With about 95% of the votes counted, the party gained about 41% of the votes. The left Syriza party of former prime minister Alex Tsipras secured about 20 % of the votes. However, according to projections of Interior Ministry, New Democracy might obtain 145 sets out of 300 in Parliament, just short of an absolute majority.

Prime minister Mitsotakis of the New Democracy Party already indicated that he wants a one-party government. If none of the major party leaders succeeds forming a government, a second election is likely this summer in which the New Democracy Party will seek a majority in Parliament.