EUR/USD tries to hold north 1.10 barrier

KBC Market Research Desk KBC Bank

EUR/USD finally regained the 1.10 barrier yesterday. After volatile trading in Asia, markets saw indications that the US and China were heading toward a (partial) trade agreement. The global risk-on move supported a congruent rise of EUR/USD, EUR/JPY and USD/JPY. During the day, the US-German interest rate differential narrowed further. The ECB minutes confirmed a highly divided MPC, raising the bar for further easing. Even so, EUR/USD gains stayed modest and there were few follow-through gains as the pair tested incoming trend line just north of 1.10. EUR/USD closed at 1.1005. USD/JPY finished the day at 107.98.

Overnight, Asian (equity) markets join the risk rally as comments from the USChina trade talks stay constructive. The yuan rebounds further (USD/CNY 7.1025). The Aussie dollar also outperforms (AUD/USD 0.6780). USD/JPY (108) and EUR/USD (1.1015/20) hardly makes any further headway on the positive trade story.

Today, the focus will stay on the US China trade talks. Eco data are scant. US Michigan consumer confidence may be of intraday significance for USD trading. Yesterday's risk-on move triggered a substantial rise in core yields and supported equities. USD/JPY and EUR/USD succeeded decently, but no exceptional gains. A trade truce still contains conflicting drivers for EUR/USD. An agreement might provide some comfort for the export-reliant EMU economy. At the same time, it might also reduce the chance for further aggressive Fed easing. On the other hand, a currency clause in the trade agreement might be USD negative. After modest USD losses last week, EUR/USD is testing an incoming trendline near 1.1010. A sustained break would improve the ST picture/ease the downside bias. 1.1110 is the next reference on the charts. A further positive development regarding Brexit might help to build a floor for the euro.

After initial weakness, sterling jumped sharply higher yesterday as UK PM Johnson and Irish PM Varadkar after a meeting indicated that they still saw ways to reach a deal. EUR/GBP tumbled from the 0.90+ area to the 0.8830 area. Ongoing talks between the UK and the EU might still be considered as constructive and sterling supportive. However, for now, there are no details on how the issue of the Irish backstop might be solved. Concrete progress in this topic is probably needed to push EUR/GBP below the 0.8787 support.

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KBC Market Research Desk

KBC Bank

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