Bond yields drive Dollar
Non-domestic influences were left to drive Sterling on Monday with the increase in global bond yields undermining the Pound, especially with concerns that global financial conditions would tighten. In light of the substantial UK current account deficit, low trading volumes will likely increase Sterling vulnerability.
The government lost the third Brexit vote in a row in the House of Lords although Sterling shrugged it off. An early decline through the 1.4000 level against the Dollar set the scene, and US gains pushed GBPUSD below 1.3950. The Euro pushed the Pound back to 1.1400 late in European trading.
Concerns intensified on whether the Bank of England would proceed with a May interest rate hike. Sterling languished below 1.3950 against the Dollar at market open. Investors will study underlying bond yield spreads to dictate the near-term direction of the Pound.
The US Dollar has shown signs of life recently as the currency rose against its major rivals yesterday as the US benchmark Treasury yield rose to 2.99%, just shy of the key psychological level of 3.0%. This moved the Dollar against the Euro to lows of 1.2191 whilst Cable dropped below the 1.4000 level to lows of 1.3922.
The US existing home sales rose to 1.1% m/m in March, up to 5.60 million from 5.54 million in February. Further, the US PMI manufacturing index rose to 56.5 and the highest level for 43 months while the services-sector index strengthened to 54.4. New orders saw a sharp increase in order backlogs and the pace of acceleration was at its fastest for just over three years. That said, strong upward pressure on prices maintained market concerns surrounding higher inflation.
The highlight of this week for the Dollar continues to be the first quarter GDP data on Friday.
Yesterday, the EURUSD pair fell to 1.2197, the lowest level since March 1st, and looks set to extend losses further, as indicated by the rise in the implied volatility premium for the Euro.
The Euro composite PMI held steady in April, close to the 14-month low seen in March at 55.2, which was marginally better than expected.
It has been posited that the risk to the Euro at this Thursday’s European Central Bank (ECB) meeting is that President Draghi may ratchet up his concerns over the outlook for the Eurozone economy – stemming from either slower cyclical macro dynamics and/or heightened trade and geopolitical uncertainties. In this dovish scenario, we could see the Euro retreat over as odds for a Q2 2019 ECB rate hike are slashed further.
In the data space, the German IFO survey will be the salient event in Euroland today.
Data to Watch:
02:30 AUD Consumer Price Index (QoQ) (Q1)
02:30 AUD RBA trimmed mean CPI (QoQ) (Q1)
09:00 GER IFO – Business Climate (Apr)
09:00 GER IFO – Current Assessment (Apr)
09:00 GER IFO – Expectations (Apr)
09:30 GBP Public Sector Net Borrowing (Mar)
14:00 USD S&P/Case-Shiller Home Price Indices (YoY) (Feb)
14:00 USD Housing Price Index (MoM) (Feb)
15:00 USD New Home Sales (MoM) (Mar)