EUR/USD stays strong despite risk-off correction

KBC Market Research Desk KBC Bank

Yesterday's sentiment on risk was constructive for most of the day, but a flaring up of geopolitical tensions between the US and China and negative headlines on corona from the likes of California finally caused US equities to return most gains (Dow) or close in the red (S&P; Nasdaq). The TW dollar followed the swings in sentiment intraday, but in the end the dollar didn't profit while the euro held up well. EUR/USD jumped from the 1.13 area to test 1.1375 intraday and preserved part of its gain despite the late session risk-off (close 1.1340). USD/JPY even maintained gains to close at 107.29. The USD/JPY performance probably was also supported by a solid bid in EUR/JPY which tested the 121.95 resistance.

This morning, Asian markets joined the correction on WS late yesterday. The dollar again hardly profits (TW DXY stable near 96.55). The yuan is losing modest ground (USD/CNY 7.01 area) even as China June trade data (imports and exports) printed better than expected. EUR/USD (1.1345 area) and USD/JPY (107.25) are also little affected by risk-off.
Today, the calendar is better filled compared to previous days including German ZEW confidence and EMU May production. In the US NFIB small business confidence is expected to rise only modestly. US June headline inflation is expected to rise to 0.6% Y/Y but core is expected only at 1.10%. Global sentiment remains the driver for overall USD moves. That said, it looks that ‘usual' USD gains due to the risk-off is a bit hindered by negative US corona developments. EUR/USD (and also EUR/JPY) are nearing intermediate resistance, suggesting a constructive sentiment on the euro. We saw EUR/USD developing a buy-on-dips pattern, with the 1.1255 area providing good support. A break above 1.1375/1.1422 would further improve the ST picture. A constructive message from the EU summit later this week might reinforce the euro bid.

Sterling returned a big part of last week's gain against the euro yesterday with EUR/GBP returning north of 0.90. Euro strength played a role but we didn't seen any UK specific news. This morning, May UK GDP and production data were weaker than expected, confirming that the road of the UK recovery will be (very) long. Sterling is losing a few ticks. The UK currency recently decoupled a bit from the usual risk-on/risk-off pattern. Even so, yesterday's poor performance suggests that a sustained return below EUR/GBP 0.90 won't be that easy, especially if sentiment on risk turns more cautious.

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KBC Market Research Desk

KBC Bank

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