European markets are little changed after earlier bullish attempts earlier in the day. Overnight, New York Fed President John Williams says the Fed should “act quickly” while the economy is slowing and rates are low. The statement fueled risk-on sentiment on growing expectations of a more aggressive rate cut by the Federal Reserve. However, a New York Fed spokesperson tried to temper those expectations, telling that the comments were part of an academic talk and “not about potential policy actions.” As a result, the upside impetus in riskier assets eased substantially. Elsewhere, investors are eager to see signs of progress in the US-China trade talks. The two countries’ officials spoke over the phone Thursday, with Treasury Secretary Steven Mnuchin said face-to-face talks could follow.
Against this backdrop, the UK’s FTSE 100 adds 0.03 per cent to 7495, Italy’s FTSE MIB loses 1.54 per cent to 21,751, France’s CAC 40 declines by 0.04 per cent to 5,548, while German DAX 30 adds just 0.01 per cent to 12,227. US stock index futures are giving up earlier gains ahead of the official open.
Today, St. Louis Federal Reserve President James Bullard noted that a 25bps rate cut this month would be appropriate and that he sees no need for larger rate cuts. After the comments, the dollar has accelerated the recovery after a sell-off yesterday, when traders rushed to price in a 50bps rate cut this month after comments from Williams. The greenback is now focused on the Federal Reserve monetary policy, so the volatility in the USD pairs could remain high in the days to come as policymakers will likely further give contradictory signals to the markets.
As such, EURUSD was rejected from highs around 1.1280 and retreated to 1.1230. Apart from stronger dollar, the downside pressure on the common currency came from German Chancellor Merkel. She noted that German economy is in a difficult phase with slower growth, weaker conditions give a reason to try and stimulate the domestic economy, and economic slowdown largely due to uncertainty in global trade. In this context, Merkel expressed hope that US and China can make progress in trade talks. Earlier in the day, the report from Germany showed that PPI declined 0.4% last month versus -0.2% expected and -0.1% in May. Despite recent rally, EURUSD remains vulnerable to fresh losses and still may challenge the 1.12 handle once again.
Oil prices dropped nearly 3% on Thursday despite the rising geopolitical tensions between the US and Iran. The fact that the market doesn’t show a reaction to this factor may point to the prevailing concerns on the demand side. This in turn highlights the risk of more dramatic bearish moves down the road. Brent registered a one-month low around $61.30 and now clings to the $63 level which represents the immediate resistance. Later in the day, Baker Hughes reveals its weekly oil rigs data. However, a bullish report will hardly be able to send the futures much higher, and the general picture shows that the market remains depressed, ignoring geopolitics.
Nathan Lambert, Head of Global FX Analytical Department