US Dollar not impressed with NY Empire State Manufacturing print

NEW YORK (June 17) The US Dollar (USD) trades flat ahead of the US session on Monday as risk aversion takes over markets amid the French political uncertainty. President Emmanuel Macron’s decision to call for snap legislative elections and the possibility of a far-right-dominated parliament spooked investors, who sold French assets on concerns about how Macron would cope with such a scenario. Sovereign bond spreads in Europe are widening even more, signalling a bond market in distress. Should the bond market continue its rout, the possibility of an intervention by the  European Central Bank (ECB) shouldn’t be ruled out in order to keep the European bond market cohesive and in sync with its monetary policy. 

On the economic data front, a very quiet start for this week from the US perspective with some lighter data ahead. Pivotal elements to look forward to are the Retail Sales on Tuesday and the Purchasing Managers Index (PMI) numbers on Friday. Traders will need to assess what will get priority: softer US data which would see an easing US Dollar, or will it be again the European political turmoil which would rather see US Dollar strength. 

Daily digest market movers: It's all about EU bonds

• At the start of the European trading session on Monday, European sovereign bond spreads are widening even further than Friday (80 basis points at the time of writing between French and German 10-year benchmark bond yields). A dispersion in sovereign bond yields per country is causing issues for the European Central Bank (ECB) as it has only one overall monetary policy rate that it can use to control inflation in the Eurozone. When bond spreads between countries are getting too wide and too dispersed, the ECB has more difficulties controlling local price forces, which might lead to local flare-ups in inflation or even sudden deflation. The second element is that those countries might start having issues to fund their sovereign debt on international markets and might trigger a bank run or having the ECB stepping in to offer a lifeline to that country so that it doesn’t default on its debt. The best example of that was Greece in 2010 during the sovereign debt crisis. 
• At 12:30 GMT, the NY Empire State Manufacturing Index for June got released. The index came in at contraction of 6, which is better than the -15.6 from previous time. 
• Near 17:00 GMT, Federal Reserve Bank of Philadelphia President Patrick Harker participates at the Global Interdependence Centre's 42nd Annual Monetary and Trade Conference.
• Equity markets are looking for direction. European equities are trying to snap the losing streak, even with the bond market turmoil. US Futures are mildly in the green. 
• The CME FedWatch Tool shows a 33.3% chance of the Fed interest rate remaining at the current level in September. Odds for a 25-basis-points rate cut stand at 59.0%, while a very slim 7.7% chance is priced in for a 50-basis-points rate cut.
• The benchmark 10-year US Treasury Note slides to the lowest level for this month, near 4.27%, ticking up a bit. 

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