Global markets showed a diffuse picture yesterday and this also applied FX trading. USD/JPY continued to profit from higher core yields and a positive risk sentiment (constructive headlines from the US trade talks). The pair closed at 107.82 (from 107.54). The euro, however, didn't profit from the risk rally. At least for now, the reflation trade supported the dollar more than the euro. We consider the move mainly as last-minute repositioning ahead of the ECB meeting rather than anything else. EUR/USD dropped temporarily below 1.10, to close at 1.1010.
Overnight, president Trump announced a brief delay in the upcoming rise in US tariffs as a gesture for goodwill to facilitate the next round of trade talks. The yuan (USD/CNY 7.085), and the likes of the Aussie dollar (AUD/USD 0.688) rose. USD/JPY surpassed the 108 barrier, but the announcement left hardly any traces on EUR/USD (1.1010/15 area).
Today, the positive headlines on trade will continue to work through in global FX trading. The US CPI and a US 30-y bond auction are interesting, too. However, the ECB policy decision evidently will be the key driver, especially for EUR/USD trading. We expect a 10 bp deposit rate cut, probably in a tiered system (markets discount chances for a bigger cut). Markets also see a chance of a restart of QE, but this isn't our base scenario. Draghi delivering less easing than expect in theory would be a euro positive. The prospect for potential further easing (or the absence of it) is also important as is the Fed reaction function. The EUR/USD decline halted last week, and the pair regained 1.10. Some more profound euro bottoming might develop if the ECB doesn't deliver on high expectations or if the market feels that the bank has limited ammunition left. Technically, the EUR/USD 1.0926 correction low should provide solid support. A return north of 1.11 would call off the ST negative alert for EUR/USD.
EUR/GBP initially traded with a slightly negative bias yesterday. EUR/USD weakness was in play. Maybe sterling also still profited slightly from headlines that the UK might consider a ‘North Ireland' backstop. However, the flow of (concrete) news on Brexit is gradually becoming thinner. EUR/GBP apparently found ST equilibrium in the lower 0.89 area. For now, we expect more technical trading, waiting for next steps in the Brexit process, probably early October.
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