German bonds trade higher ahead of 5-year auction, ECB policy decision

The German government bonds traded higher Monday as investors wait to watch the country’s 5-year auction, scheduled to be held on September 6 by 09:35GMT. Also, the European Central Bank’s (ECB) monetary policy decision, due on September 7 by 11:45GMT will provide further direction to the debt market.

The German 10-year bond yields, which moves inversely to its price, fell nearly 1-1/2 basis points to 0.36 percent, the yield on 30-year note slipped 1 basis point to 1.15 percent and the yield on short-term 2-year traded flat at -0.73 percent by 08:50GMT.

The main economic event in the coming week will be Thursday’s ECB policy announcement, with the markets looking for guidance on the outlook for QE in the New Year. But although ECB President Mario Draghi might provide the odd clue, the ECB’s updated economic forecasts might also be informative have some lessons, and any utterances with respect to the strength of the euro will be closely scrutinized, we certainly don’t expect full clarity this week.

Given continued unease about the subdued nature of underlying inflation, and with some members concerned about risks associated with a possible overshooting of the euro, Draghi was deliberately circumspect following the Governing Council’s July meeting. In particular, the ECB left its forward guidance unrevised and was unwilling to offer a precise date for when the Governing Council might decide its next steps with respect to asset purchases once the current program of €60bn per month concludes at year-end, merely stating that this would be discussed sometime in the autumn.

In addition to the ECB policy announcement, this week brings a handful of noteworthy new economic data from the single currency zone, with Thursday’s releases of German July IP data and the second estimate of euro area Q2 GDP (which includes the first estimates of the expenditure components) perhaps most interesting. In particular, consistent with recent surveys, German IP is expected to post a rise on the month to take the annual growth rate back above 4.0 percent y/y. And the euro area GDP data should confirm the initial estimate of growth of 0.6 percent q/q and show that domestic demand remained the principal driver.

Meanwhile, the German DAX traded 0.51 percent lower at 12,080.50 by 09:00 GMT and the FxWirePro's Hourly Euro Strength Index remained neutral at -9.70 (higher than +75 represents bullish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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