The dollar reversed earlier losses end of last week. China preparing a new security law for Hong Kong further escalated tensions between the US and China. The risk-off supported the yen and the dollar. EUR/USD on Thursday tried a new topside test of the 1.10 area, but it was again rejected. Next to the China-related risk-off, intra-EU political division on the structure of the EU rescue package also undermined initial optimism on a German-French proposal that the supported the euro earlier last week. EUR/USD closed the week at 1.0901. USD/JPY held within the tight ST sideways trading pattern to close at 107.64.
This morning, Asian markets show mixed picture. China and Hong Kong underperform as political tensions persist, with China warning the US that their mutual relationship could move to a new cold war. The yuan stays under pressure. The PBOC put the yuan reference rate at the weakest level since 2008. The offshore yuan also weakens further north of USD/CNH 7.15. Japanese markets outperform as the country will lift the state of emergence and as the government prepares an additional stimulus plan. The yen weakness slightly (107.65 area). EUR/USD hovers in the 1.09 area.
Today, trading will probably develop in thin market conditions as US and UK investors enjoy a holiday. German IFO business confidence is expected to rise slightly from last months depressed levels. It will be interesting to see the reaction in cease of a (mildly) positive surprise. At same time, political bickering on the EU rescue package will probably continue. The EU commission is expected to launch its proposal on Wednesday. Four northern countries repeat their view that they only want loans and no grants for countries that need support. Last week’s rejected test of 1.10 again pushed EUR/USD well within the sideways consolidation pattern between 1.0727 and 1.1018. Some further slide within the established range is possible as sentiment remains fragile.
In line with EUR/USD, EUR/GBP also tested resistance near 0.90 on Thursday, but no break occurred and EUR/GBP returned in the 0.89 big figure. Headlines coming from the UK are not really sterling supportive. PM Johnson is under pressure on Dominic Cummings breaking lockdown rules, the EU-UK talks are in an absolute stalemate and the debate on negative rates lingers. We assume EUR/GBP to be rather solid support.
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