EUR/USD regains 1.10. US data in focus

KBC Market Research Desk KBC Bank

The EUR/USD rebound that started after a poor US ISM continued yesterday. The dollar weakened further, but sentiment on the euro also improved. Global sentiment turned outright risk-on reducing safe haven USD buying as political tensions in Hong Kong eased. Chinese authorities signalled further monetary easing, too. On the euro side, EMU PMI's indicated mediocre growth but showed signs of bottoming. A no-deal Brexit was blocked in the UK Parliament. ECB president nominee Christine Lagarde acknowledged the need for a stimulating policy but also mentioned the side-effects and sees a case for fiscal stimulus. EMU yields rebounded and EUR/USD regained the 1.10 handle (close at 1.1035). USD/JPY rebounded to close at 106.39.

Overnight, US and China announced further talks on trade that might result in a higher-level meeting next month, supporting the positive risk sentiment. The yuan (USD/CNY 7.1350) and the likes of the Aussie dollar (AUD/USD 0.6815) extend their recent rebound. USD/JPY makes some cautious further progress. EUR/USD stabilizes in the 1.1030 area.

(Improved) sentiment on risk will still be an important driver for FX trading. In this respect, we look out whether the rebound in EMU yields continues. Regarding the data, the focus turns to the US (ADP, claims non-manufacturing ISM). The poor manuf. ISM alerted markets on a US slowdown. However, we don't expect ADP/ISM today to be that weak to materially raise market speculation on a 50 bp September rate cut. Anyway, tomorrow's payrolls will be more decisive.

The USD rally was blocked earlier this week (man. ISM) and interest rate differentials narrowed slightly in favour of the euro. We look out whether this continues. ST negative momentum in EUR/USD eased, but the technical picture stays fragile and a sustained euro comeback is not evident before next week's ECB decision.

A return north of 1.11 would call off the ST negative alert for EUR/USD. Sterling rebounded further yesterday as the House of Commons prevented the UK from leaving the EU without a deal. PM Johnson's request for new elections was rejected (for now). In theory all options are still open, but chances on a no deal Brexit have declined materially, bringing sterling in calmer water. Recently, we assumed that quite some bad news is already discounted and stayed cautious to engage in ‘last minute' sterling shorts. Pressure on sterling is easing, but given the lack of political visibility we don't expect a big leap higher, yet.

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KBC Market Research Desk

KBC Bank

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