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Taper Talks and Change in ECB Expectations Send Bond Prices Lower

Benjamin Spier

EUROPEAN SESSION UPDATE: Although European stocks are trading higher after the PMI beats, bond prices are lower along with the Euro against the US Dollar…

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The biggest headline of the European session was the better than expected rise in Euro-zone PMI’s for August to two-year highs. Although European equity indexes reacted positively to the news by rising significantly, the Euro has not shown any major gains in today’s trading.

Furthermore, although European equities and US futures are trading higher, European bond prices are significantly lower today. UK 10-year bond yield is trading 4.9 bps higher at the time of this writing, and Italian benchmark yield is trading 2.2 bps higher. The weird divergence in the direction of equities and bonds may be due to further effects of the ‘Septaper’ talks, which were reinforced by yesterday’s release of the FOMC minutes.

Also announced in the Euro-zone today, Citigroup no longer expects the ECB to cut interest rates in Q4, and the bank expects rates to remain unchanged for a longer period. The change in expectations for further monetary loosening probably stems from the rise in Euro-zone GDP in Q2, and any expectations for hawkish central bank policy may have been recently fanned by comments from the Bundesbank saying the ECB may still raise the target interest rate.

Finally, Greece has returned as a topic of interest for European leaders, as many of them are discussing the possibility that Greece will require more aid. Today, Eurogroup head Dijsselboem said that Greece will need another aid package, probably when the current aid package ends at the end of 2014.

The Euro continues to trade slightly above 1.3325 against the US Dollar. A 6-month high recently set at 1.3451 may provide resistance here, and a broken resistance line around 1.3180 may provide support.

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EURUSD Daily: August 22, 2013

Taper_Talks_and_Change_in_ECB_Expectations_Send_Bond_Prices_Lower_body_eurusd_daily_chart.png, Taper Talks and Change in ECB Expectations Send Bond Prices Lower

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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