EURUSD jumps higher, testing first resistance

KBC Market Research Desk KBC Bank

Yesterday, tentative FX trends from earlier this week continued and even accelerated. Risk sentiment improved as trade tensions moved to the background. The USD bid ebbed further even as US interest rates kept near the cycle peak. At the same time, the euro showed already resilient of late. A resumption of the equity rally finally triggered a euro short squeeze with the EUR/USD clearing the 1.1720/33 resistance. US data were OK but didn't help the dollar. EUR/USD closed the session at 1.1777. USD/JPY initially hardly profited from the rise in core yields and the positive risk sentiment. However, both EUR/JPY and USD/JPY finally joined the risk-on trade. USD/JPY finished the session at 112.49. Overnight, risk rally continues with most Asian indices recording gains of 1% or more. The BOJ trimmed its (regular) purchases LT JGB's. LT yields spiked higher this morning as markets ponder whether the BOJ also intends some kind of implicit tapering. However, the BOJ action didn't support the yen. USD/JPY even extended gains in line with the global risk rally. USD/JPY trades in the 112.75 area. EUR/USD maintains yesterday's gain. The Hong Kong dollar also succeded a remarkable rebound. Today, there are only second tier data in the US. In EMU, the composite PMI is expected little changed at 54.4. We don't expect a substantial positive surprise. Trading in the major euro and USD cross rates will probably again be driven by global sentiment. Political event risk isn't out of the way yet (trade, Italy, Brexit). However, markets apparently assume that a substantial part of the ‘bad news' has passed, at least for now. So, there is no obvious reason to row against the risk trade and against the associated FX move. So, if no new event risk pops up, the combined EUR/USD, EUR/JPY and USD/JPY rally maybe has some further to go in a day-to-day perspective. EUR/USD 1.1791/1.1850 is the next EUR/USD technical resistance on the charts. Despite the current setback, we stay more positive on the USD in a LT perspective.

Yesterday, EUR/GBP initially declined. Sterling profited from strong UK retail sales and markets hoped that the EU summit would yield positive headlines on Brexit. However, the last hypothesis wasn't really confirmed. The Brexit stalemate persists. EUR/GBP returned to the 0.8880 area. Today, the UK public finance data won't change the global picture. We assume that the recent GBPrebound has run its course for now. More trading around EUR/GBP 0.89 might be expected.

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KBC Market Research Desk

KBC Bank

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