Whilst European markets sunk lower in the previous session, Wall Street, managed to pull off a positive close, helped higher by financials and tech stocks. US markets shrugged off weaker than expected GDP data to advance 0.5%, a sharp contrast to the 1.4% decline experienced by the Dax.
There was a slight increase in optimism across the US session, and whilst risk trends stabilized, they are far from being at encouraging levels. With fragility on the markets running high the slight pick up in sentiment on Wall Street failed to transfer comfortably across to Asia overnight, where some Asian indices continued to languish at 9-month lows. Trade frictions were once again responsible for the sell off. A move in China to reduce restrictions on foreign investment and open up the market helped to lift the index 1.8% after it plunged into bear market territory early this week. European bourses are also pointing comfortably higher.
EU Migration Deal Approved, Euro Rallies
After consolidating close to 11-month lows the euro rallied 0.4% on news that the EU had agreed a migrant deal. The migrant crisis in Europe threatened German Chancellor Angela Merkel’s fragile coalition, which was in danger of collapsing if she left the summit without a deal. The euro picked up from €1.157 to €1.162 in the space of a few short minutes.
Inflation data this morning could help boost the common currency. Eurozone CPI is expected to tick higher in June to 2% y/y, which is mainly energy price driven. Regardless, this would still support the case of further tightening and be an encouraging sign after the dovish ECB comments at the June policy meeting. Should this be the case then we could see the euro look to regain the €1.18 handle.
Later in the session US core PCE for May will be released, the Fed’s preferred measure of inflation. The core PCE is expected to have ticked 0.2% higher in May, the same progresion as April. This would take the year on year reading to 1.9%, just shy of the Fed’s 2% target. Looking back to the FOMC the Fed indicated that here would be two more rate rises across the remainder of the year, taking the total to 4. The market has yet to convincingly price in a fourth and final rate hike, with the probability at just 28% for the final hike to go ahead. A strong inflation reading could go some way to lifting the probability of a total of 4 rate hikes across the year and could therefore boost the dollar.