Monday, 20 June 2022
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•          A hectic week ended on a calmer note. The wild bond swings eased somewhat – at least compared to the moves in the days before. US Treasuries forfeited some of the sharp gains that intensified in the final trading hours on Thursday. Yields rebounded between 2.4 bps (20y) to 8.6 bps (2y). German Bunds outperformed after having missed out on that late-session UST acceleration. The German yield curve bull steepened with changes ranging from -8.6 bps (5y) to flat (30y). Commodity prices turned a bit less red-hot too. The likes of oil fell more than 6% (Brent closed at $113/b). Copper extends a two-week slide by almost 3% to close at the lowest level since September last year. Easing commodities may suggest inflation fears have once again made way for growth concerns. But this didn’t stop equities from catching a breather after some significant losses earlier. Both European and US indices stabilized or even gained marginally. The dollar strengthened from below 104 (trade-weighted DXY) to 104.70, erasing much of Thursday’s yield-driven declines. USD/JPY, with the help of the stubborn BoJ, skyrocketed back to the multi-decade highs at 135. EUR/USD retreated from 1.055 to 1.05. Commodity currencies including the Aussie dollar suffered. Sterling was not in a great shape either with markets already paring back bets on BoE hikes again. EUR/GBP found support from the upward sloping line that is holding up the pair since mid-April. The couple rose from 0.854 to 0.859. The Swiss franc continued to appreciate after the CNB shocker hike. EUR/CHF dipped sub 1.02.

•          After last week’s hawkish actions and language, focus turned back from inflation to growth. Asian equity markets trade in the red with South Korea underperforming (-4%). Core bond futures trade near Friday’s closing levels. US cash markets are closed in observance of Juneteenth. The dollar is a bit in the defensive, depreciating against most of the G10 peers. EUR/USD surpasses 1.05 again. USD/JPY’s attempt north of 135 is unsuccessful as of yet. The yuan strengthens back below USD/CNY 6.70.

•          US markets are closed and the European economic calendar is vast emptiness. We do note the avalanche of ECB speakers, including president Lagarde and chief economist Lane. But we don’t expect them to deviate from the narrative told two weeks ago. Attention later this week goes to the Fed’s semi-annual testimony before Congress of which the text was already publish last Friday. PMIs are also due this Thursday while the UK braces for 9%+ inflation on Wednesday and dire retail sales on Friday. For core bond markets we stick to the view of sideways consolidation as we feel that enough tightening has been priced in for the time being. That should also rein in the dollar a bit. The upcoming string of probably not very rosy UK data combined with the technicals may keep sterling under pressure.

News Headlines

•          French President’s Macron Ensemble group remained the biggest group in the French national Assembly after the second round of the Parliamentary election. However, Ensemble failed to reach an absolute majority of 289 seats out of 577 seats. Ensemble currently is expected to gain 245 seats. The leftist coalition led by Jean-Luc Mélenchon (Nupes) is reported to have gained 131 sets. The far right national party surprised with bigger than expected 89 seats. The center right Republicans and its allies secured 61 seats. Having no majority in the National Assembly might complicate President Macron’s reform agenda as he probably will need to look for support mainly with Nupes or the center right Republicans on specific policy issues.

•          Erik Thedeen, currently the head of the Swedish Financial Supervisory Authority will become the new Governor of the Swedish Riksbank. He will replace Stefan Ingves who was head of the Swedish central bank for 17-years. Thedeen will take up its new job starting on January 1 of next year and is appointed for a term of six years. Ingves during his term mainly focused on bringing inflation sustainably back to the inflation target in a context of low inflation. Thedeen comes at the helm of the Riksbank as policy needs to bring excessive inflation back down to the Bank’s inflation target. In this move, new Riksbank governor, amongst others, will have to take into account the financial stability risks due to high household debt.


Real yields took over from inflation expectations in pushing the German 10-yr yield beyond long term resistance at 1.13% (2012 & 2013 bottoms) to 1.24% (38% retracement on 2008-2020 decline). The next technical reference are 1.9% (50% retracement) to 2.09% (2013 high). The ECB finally turned the corner in its inflation narrative. The central bank will end net asset purchases this month, facilitating rate hikes from July.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A second 75 bps rate hikes in July is still on the table. Quantitative tightening will hit max speed by September. After a small correction in May, anticipation on even faster Fed tightening pushed the 10-y yield above the 3.2% (YTD high)/3.26% (2018 high) resistance. For now the 3.5% looks to provide strong resistance

EUR/USD tested the 2017 low at 1.0341 which survived. The pair (temporarily) rebounded mainly as the broader dollar rally took a pause. However, the 1.0806 resistance still proved one step too far, even as the ECB formally announced to start hiking rates as inflation stays unacceptably high. A persistent risk-off supports the dollar again. The 1.0341 area is again on the radar.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubts filtering through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP towards 0.872 resistance. The BoE in June signaled it might step up tightening, but it is unsure whether this will change fortunes for sterling.

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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