EUR/GBP jumps north of 0.88 on BOE rate cut

KBC Market Research Desk KBC Bank

A countermove to the corona & oil risk-off trade kicked in yesterday. The trigger wasn’t that obvious, and it developed in an uneven way during the day and across markets. Several governments, including the US, preparing fiscal measures maybe gave investors temporary comfort. Equities, core yields and the dollar staged a comeback with the move accelerating during the US trading session. The trade-weighted dollar (DXY) rallied from the mid 95 to the mid 96 area. USD/JPY came within reach of the 106 big figure and closed at 105.64. EUR/USD finished the day at 1.1281, near the intraday low.

This morning, the glass is again rather half empty than half full. Markets apparently grow more uncertain on the timing, the content and the efficacity of the (US) fiscal measures. Equities in Australia and South Korea are losing up to 3.0%. Losses in other regional markets are smaller. A new slide in US yields blocked the USD-rebound. USD/JPY slipped back to the 104.50 area. EUR/USD has currently returned to the 1.1350 area. The yuan shows no clear trend (USD/CNY 6.9475 area).

Later today, the US CPI data will be published. However, data are no big issue for FX markets. If anything, timely activity data might get some attention, probably not price data. The focus turns to the fiscal response to the corona crisis (inside and outside the US). Several governments announced or are preparing measures. However, we doubt that the amounts and the nature of the measures will be sufficient to boost confidence in a sustained way. If this leads to a new wave in the risk-off trade, the dollar might face more headwinds than the euro, even as the EU fiscal response is limited, too. Yesterday, we assumed the dollar to be captured in a sell-on upticks pattern. We hold on to that view. 1.1250/1.1620 might be a new trading range, with intermediate resistance at 1.15. We don’t anticipate a sustained USD rebound yet.

Yesterday, EUR/GBP showed some nervous intraday swings. At the end of the day, sterling traded at the weakest level against the euro since October. The risk rebound didn’t help sterling much. At the time of writing, the BOE cuts its policy rate by 50 bp.to 0.25%. EUR/GBP rallies north of 0.88. Later, the focus turns to the UK Budget. Question is whether enough spending will be directed to the short-term-term impact of corona, rather than to LT topics (infrastructure etc). If not, sterling might stay in the defensive.

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KBC Market Research Desk

KBC Bank

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