Powell stays optimistic, USD rebounds

KBC Market Research Desk KBC Bank

Yesterday, the dollar started on a soft footing. EUR/USD tested the 1.1745 area. The greenback regained the lost territory ahead of Fed's Powell testimony. Powell was outright positive on the US and even on the global economy. He also wasn't too worried on the impact of the trade tensions or on the flattening of the yield curve. US yields rose marginally. The 2-yr yield set a minor cycle top. The dollar extended its intraday rebound. EUR/USD finished at 1.1661. The USD/JPY rebounded more forcefully with the pair heading to the high 112 area, supported by a revival in risk sentiment. Overnight, Powell's positive message also supports Asian equities. The dollar extends its rebound albeit at a slower pace. The trade-weighted USD regained the 95 level. USD/JPY is testing 113. EUR/USD trades near 1.1650. For now, the strong USD has little effect on EM/Chinese markets. USD/CNY (6.71 area) is holding near the recent peak. Today, the eco calendar is thin with only US housing data and the final EMU CPI. Powell will attend the second part of his Congressional hearing before the House, but it isn't Powell's style to amend yesterday's assessment. So, global risk sentiment and the ‘fall-out' from Powell's assessment will set the tone for global FX trading. The Fed Beige book is a wildcard. At the end of last week and early this week the dollar was losing momentum. However, yesterday's optimtic view from Powell again supports the dollar. At the same time, the rise in US yields (and thus the interest rate support for the dollar) remains modest. EUR/USD is locked in the 1.1510/1.1850 range. It looks that the topside is blocked for now. USD/JPY is better bid. Intermatiate reistance comes in at 113.75 ahead of the 114.75/115.51 range top.

Yesterday, UK labour data were mixed with only a temporary positive impact on sterling. The focus for sterling trading was on yet another Key Brexit vote. May survived the vote as an important amendment from pro-EU rebels was narrowly rejected. Sterling was under pressure ahead of the vote, but rebounded afterward. However, EUR/GBP still closed the day at 0.8890. Today, UK June headline CPI is expected rise to 2.6%. Core inflation might decline to 2.0%. The data probably won't change BoE rate hike expectations in a profound way. However, even after yesterday's events, the Brexit chaos persists. The decline of sterling might slow, but we see no reason for a sustained rebound.

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KBC Market Research Desk

KBC Bank

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