EUR/USD settles in sideways range

KBC Market Research Desk KBC Bank

Yesterday, recent USD comeback petered out. The positive tone of Fed's Powell before Congress temporary supported the dollar, but the move already ran into resistance yesterday. Poor US housing data (higher costs?) maybe helped to block further USD gains. In the Fed Beige Book some districts hinted that tariffs are causing higher costs. However the report had little direct impact on the dollar. EUR/USD finished the day slightly lower at 1.1639, but off the intraday low. USD/JPY failed to sustain north of 113 (close 112.86). Overnight, Asian markets give mixed signals. Chinese equties again underperform. The PBOC weakened the fixing of the yuan further. USD/CNY trades at 6.74 (CNH touched 6.78). CNY weakness is reinforced by rumours on further PBOC easing. At the same time, Chinese officials indicate they will optimize macroprudential measures to manage capital flows resulting from trade war uncertainy. The impact from China on other regional markets stays modest. The Aussie dollar (AUD/USD 0.7420) profited (temporarily?) from strong Australian labour data. EUR/USD stabilizes in the mid 1.16 area. USD/JPY hovers near 112.75.
Today, the eco calendar is thin with only the US jobless claims and the Philly Fed Business outlook scheduled for release. The reports won't change markets' view. US yields are tentatively rising after Powells comments before Congress, but it is far from evident for these small moves to have an impact on the dollar. Last week, EUR/USD temporary gained a few ticks on USD weakness, but returned back to the middle of the 1.1510/ 1.1850 range after Powell. For now we see no trigger to break the stalemate. Higher US yields might give the USD downside protection. Uncerainty on China and a slowdown in the US equity rally capped the USD/JPY rally, but for now there is no trend reversal yet.

Yesterday, sterling remained in the defensive. The Brexit turmoil and a soft UK June CPI weighed on the dollar. EUR/GBP stayed north of 0.89, but further gains were modest. The Brexit stalemate persists, but it might move a bit to the background as UK politics is gradually shifting into holiday modus. Today, UK June retails sales will be published. A small rise is expected after a strong figure in May. A really poor report is probably needed to create further doubts on an August rate hike. Pressure on sterling might slightly ease as Brexit headlines are fading temporarily. EUR/GBP 0.8968 is a first important resistance.

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KBC Market Research Desk

KBC Bank

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