Tuesday, 31 May 2022
Please  click here  to read the PDF version


•          Surprisingly high and accelerating inflation in Belgium, Spain and Germany defined an exclusively European trading session yesterday (US closed for Memorial Day). European/German yields were already headed north at the open in an attempt to shake off the recent status quo. The inflation figures generated additional momentum with traders ramping up ECB normalization bets. Yields shot up between 6.9-11.1 bps in Germany, the front-end underperforming. European swap yields printed gains ranging from 2.7 bps (30y) to 8 bps (3y). Brent oil prices extended their recent rise to well north of $120/b, helping yields push higher too. There was probably some speculation involved about the EU ready to ban Russian oil imports. This was indeed eventually agreed upon late yesterday evening (cf. infra). Rich interest rate support hurled EUR/USD beyond the intermediate 1.0758 resistance to close at 1.0779. We spotted a pinch of general dollar weakness too, losing against eight of the G10 peers. The trade-weighted index tested 101.27 support (23.6% retracement of the 2021-2022 rise). The battle for EUR/GBP 0.85 continues with the pair yesterday again closing above (0.852). PM Johnson is back in the spotlights, with more Conservative MP’s calling for him to quit following the partygate scandal yesterday. Some senior MP’s said Johnson was likely to face a vote of no confidence as leader of the party if the Tories lose two parliamentary by-elections (in Tiverton and Honiton) next month. It’s worth following up.

•          Asian equities trade mixed this morning. Japan underperforms while China (+1% +) profits from better-than-expected PMI readings (see below). US bond yields jump up to 10 bps in a catch-up move with Fed Waller adding to the move yesterday by backing 50 bps hikes for “several meetings”. Bund futures extend their downtrend. The dollar is this morning’s best performer. DXY rises to 101.59, EUR/USD slips to 1.075.

•          Today’s economic calendar contains US Conference Board consumer confidence, expected lower at 103.8 from 107.30. House price data may be interesting to take a closer look at too with some other housing series suggesting an over-the-peak market. The European inflation figure will grab most headlines though. Expected at 7.8% y/y we see risks for an upward surprise into the 8% following yesterday’s national releases. It may not prompt a reaction as big as yesterday but it should keep (European) yields supported anyway, especially with crude/commodity prices rising further.  EUR/USD came close but never really tested the 1.08 big figure yesterday. We’re keen to find out whether the data today is the trigger needed. Resistance at 1.0806 should be taken out for the technical picture to turn neutral. In Central-Europe we watch for the Hungarian central bank to slow the tightening pace at its meeting.

News Headlines

•          The EU reached an agreement that is expected to cut 90% of European oil imports from Russia by the end of the year. It is seen as removing a big obstacle for a sixth package of EU sanctions against Russia. According to the agreement, EU oil imports via tankers which amount to about two thirds of Russian oil import will halt immediately. On third of the import comes via the Druzhba pipeline. When German and Poland stop buying Russian oil via this pipeline by the end of the year, EU oil imports from Russia will be reduced by 90%. 10% of the imports via the Druzhba pipeline will be temporarily exempted to address concerns of Hungary and other regional countries that argued it was unable to immediately replace its Russian oil imports. The price of Brent crude oil rose further overnight reaching $123 p/b this morning.

•          According to the official China PMI’s, the pace of contraction of the Chinese economy slowed in May. The measure for activity in the manufacturing sector rose from 47.4 to 49.6. The non-manufacturing sector jumped from 41.9 to 47.8, bringing the composite index 48.2. The data suggest that the worst of the impact of the corona lockdowns might be over as authorities resort to measures to support activity. However, with indices still in contraction territory, the recovery might remain slow and it will remain difficult for China to reach the 5.5% growth target this year. The yuan is trading marginally strong at USD/CNY 6.665 this morning.


The ECB will end net asset purchases in June. A first rate hike is likely in July. Speculation has caused real yields to bottom out. Inflation expectations, while still high, are correcting lower from record highs. The worrying growth outlook complicates the picture and triggered a first meaningful correction since the start of the Russian invasion. Support at 0.80% stood firm though and was followed by return action back to 1.0%.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. Quantitative tightening will start in June and hit max speed from September onwards. But the recent yield surge this caused, has eased recently. Yields may be entering a period of consolidation. Important support is located at 2.72%.

EUR/USD lost the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, worsening the technical picture. At first, the ECB flagging the rate lift-off in July didn’t help much. However, the 1.0341 2017 low survived. The pair regained 1.0636 and serves as a sign of easing downside momentum. The next reference stands at 1.0806.

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 temporarily above the 0.8512 level. A sustained break would be a bad omen for sterling.

Calendar & Table

Note: All times and dates are CET. More reports are available at KBCEconomics.be 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).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources.
It has not been assessed as to whether or not these insights would be suitable for any particular investor.
Opinions expressed are our current opinions as of the date appearing on this material only and can be opposite to previous recommendations due to changed market conditions.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
Given the nature of this advice (linked to currencies and interest rates) , the advice is overall not specific in nature.   As such there is no reference to any corporate finance contract and as such there is no 12 month overview based on the different advices.
This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

Register for a 2 week free trial today, pass a Growth, Venture or Rocket Tryout and get a funded prop trading account for upto $120,000.