Yesterday, the dollar made a ‘remarkable’ intraday reversal. At first, USD strength coincided with an ongoing positive risk sentiment, supported by the massive fiscal and monetary efforts put in place in the US (and elsewhere).Currently it is not easy to understand intermarket links, but later in the session, the rebound in EUR/USD / correction of the USD at least coincided with a steepening of the US yield curve and interest rate differentials narrowing against the dollar. EUR/USD closed the session at 1.0882. USD/JPY closed the session little changed at 111.21.

This morning, risk sentiment is again more fragile. There are now several fiscal and monetary lifelines in place, but it is often unclear how efficient they will be in addressing the disruption of the crisis. This also applies to the US. Whatever the driver, the yen this morning again looks like attracting some safe haven flows. USD/JPY is changing hands in the 110.65 area. EUR/USD hovers around 1.09.

With the Fed measures and the US fiscal package approved, FX markets today will look for other drivers. We look out for the US jobless claims and for the political/fiscal response of the EU leaders. In Europe, the political debate is focused on whether any help should come via combined ESM/OMT support lines or whether the EU response should be financed via corona-bonds. It is important that a decision will be taken. The ESM/OMT option, should be rather ok for the euro as it will be an efficient backstop for peripheral bond markets. In the US, we are very keen to see the reaction of global and US markets (including the dollar) on the US jobless claims. Of late, a risk-off market supported the USD. The jury is still out, but we are bit more cautious to simply expect this pattern to repeat if it is triggered by bad news on the US labour market and maybe investors doubting the viability of the US institutional framework to address this issue. Recently, we saw the 1.0880/1.09 area as a first topside EUR/USD resistance. The pair holding above that level due to negative news from the US would be significant/interesting.

Yesterday, sterling was initially supported by a better risk sentiment, with EUR/GBP even temporarily moving below 0.91. Receding optimism and the EUR/USD rebound caused EUR/GBP to close at 0.9166. Today, the BoE will probably leave its policy unchanged. Investors might look for hints on further BoE actions if they were necessary in the future. With sentiment turning more risk-off, EUR/GBP might again drift higher in the established range.

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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