KBC Market Research Desk
KBC Bank
EUR/USD trading showed two faces yesterday. USD strength initially prevailed. Uncertainty on the status of the US-China trade negotiations initially supported bonds and the dollar. EUR/USD drifted back lower to the 1.10 previous resistance area. From there, a new risk-rebound kicked in. First US corporate earnings were assessed positive and headlines said the EU and the UK came ever closer to striking a Brexit deal. EUR/USD, USD/JPY and EUR/JPY all jumped higher as did core yields. USD/JPY closed at 108.86 (from 108.40). EUR/USD reversed the intraday decline to finish the day little changed at 1.1033.
Overnight, Asian equities initially joined the risk rally on WS. However, sentiment, especially on Chinese markets, deteriorated as China said it would retaliate political action in the US Congress to support the Hong Kong protests. The yuan weakens (USD/CNY 7.10 area). USD/JPY is also losing momentum (108.65). EUR/USD is little changed (1.1030 area). The Korean won weakens after the BoK cut its policy rate by 25 bp.
Regarding the eco data, US retail sales take centre stage today. The consensus expects ‘control group sales’ to rise for a seventh consecutive month. We see an asymmetric risk for the dollar being more sensitive to a negative than to a positive surprise. China-US (trade) relations and, even more, Brexit remain a wildcard. A Brexit deal would be euro supportive even as there remains uncertainty whether Boris Johnson will be able to get the deal approved in Parliament.
Last week, EUR/USD regained 1.10, but there were no follow-through gains. Easing trade tensions are positive for the export-reliant EMU economy, but the deal remains uncertain. A Brexit agreement would remove a high-profile source of E(M)U uncertainty. Such a deal at least should help EUR/USD to rebound further off the 1.10 support. The pair regaining the 1.1110 area would further improve the technical picture.
Over the previous days, sterling traders already positioned for a growing chance of a last-minute Brexit deal. Constructive headlines especially from EU sources yesterday gave sterling another shot in the arm. EUR/GBP dropped to the 0.8630 area. Today, the key question apparently is whether the DUP party will approve the deal. An approval might cause sterling to look for a new equilibrium at a higher level. The 2019 correction low of EUR/GBP comes in at 0.8472. As always in Brexit, last minute twists are never excluded.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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