Monday, 19 September 2022
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•          Last week, a strong flattening/inversion move illustrated investors’ believe in a further frontloading strategy as global central banks are trying to regain control on inflation. Despite mostly hawkish ECB speak of late and the Fed keeping silent ahead of this week’s policy decision, the US yield curve still took the lead. In a weekly perspective, US yields rose between 31 bps (2-y) and 6.6 bps (30-y). The 10-y yield rose 14 bps and this move was fully due to a higher real yield (+19 bps to 1.072%). European swap yields in a weekly perspective gained between 23.1 bps (2-y) to stay unchanged from the 10-y. The tightening of financial conditions via higher (real) yields kept equities in a tailspin (S&P -5.0% for the week). The dollar remained in pole position in this pre-Fed repositioning, but gains could have been more outspoken (DXY up about 0.8% in a weekly perspective). On Friday, especially the trends on interest rate markets gradually shifted into a lower gear. US yields closed mixed (30-y +4.7 bps, 5-y -3.5 bps). EMU yields even corrected 2.5/3.5 bps lower. Friday’s Uni. of Michigan consumer confidence survey this time failed to give any additional directional guidance. Sentiment as such was close to expectations (59.5 from 58.2). Inflation expectations even eased slightly from 4.8% to 4.6% for the 1-y measure and from 2.9% to 2.8% for the 5/10-y measure. US equities lost less than 1.0%. The dollar finished off the intraday highs with DXY at 109.76. EUR/USD closed just north of parity (1.0016). The threat of interventions kept USD/JPY away from the 145 resistance (close 142.92). Sterling stayed in the defensive after awful August retails sales. EUR/GBP (close EUR/GBP 0.8768) closed well above the key 0.8721/31 resistance area. Cable intraday touched the weakest level since 1985 to close at 1.1420.

•          This morning, Asian markets mostly trade with a moderate risk-off bias. However Japanese markets are closed this morning and this will also be the case for London markets. On Chinese FX, the PBOC still tries to cope with the fall-out from the strong dollar. Still USD/CNY (7.011) extended gains north of 7.00 even as the PBOC put the daily fix at the strongest deviation versus expectations on record. The dollar gains modestly overall (DXY 109.95, USD/JPY 143.26). Today, there are hardly any eco data with market moving potential. Markets will look forward to a long series of central bank policy decisions including the Riksbank (Tuesday), the Fed (Wednesday) and the Norges bank, The Bank of England, the Bank of Japan and the Swiss national bank all scheduled to announce decisions on Thursday. The Fed evidently is the key reference. A 75 bps hike is fully discounted. Markets see about a 1 in 5 chance on a 1.0% step. We err for the Fed to keep a 75 bps pace. Maybe the dots might cement market expectations for a similar step also for the November meeting. We anticipate both interest rate markets and the dollar to take a breather ahead of Wednesday’s Fed decision. Equities remain wildcard, especially for the USD performance.

News Headlines

•          The European Commission recommended member states to vote to suspend €7.5bn in cohesion funding over rule of law violations. That’s around a third of the total €22bn EU-funds Hungary is due to receive from the 2021-27 EU budget. Commissioner Hahn referred to Hungary’s lack of transparency in awarding public contracts, shortcomings when it comes to tackling corruption and weaknesses in prosecuting those who misused EU funds. Budapest in August published 17 proposals to address the EU concerns, but Hahn concludes that they are insufficient to put an end to risks to the EU budget and the EU’s financial interests. Hungary is given until November 19 to come up law changes or risk missing out on the funds. The latter could trigger rating downgrades and has proven to be a weakness for the forint. The Hungarian currency is still trading near record lows at EUR/HUF 405.

•          A South Korean finance ministry official said that authorities will meet with major export and import firms to discuss ways to stabilize dollar supply and demand. They aim to increase market oversight after the Korean won dropped to its weakest level since March 2009 (USD/KRW 1400) despite likely interventions. Measures to be discussed include encouraging imports needing dollar funds to tap the offshore bond market. Banks will be asked to report their dollar transactions and currency positions every hour instead of three times a day.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike and a 75 bps follow-up move. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside. The YTD high at 1.93% comes into play.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT hits max speed. The 10y briefly dropped below the lower bound (2.70% area) of the sideways range, but a sustained break lower was averted. The 3.50% barrier is coming within reach as the focus is back on Fed frontloading to tackle inflation.

EUR/USD is in a strong downward trend channel since February. Last week’s hawkish ECB meeting, attempts to tackle the energy crisis and a risk rebound gathered some euro-momentum. The upper bound of the downward trend channel kicks in as first resistance around 1.0150.

The Bank of England hiked by 50 bps in august. More hikes are coming but are priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP broke out of the corrective downward trend channel since mid-June and extended gains beyond the key 0.8721 YTD level. 0.8866 is next reference on the charts.

Calendar & Table

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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