Risk-off to favour USD more than euro?

KBC Market Research Desk KBC Bank

On Friday, EUR/USD profited temporarily from stronger than expected EMU PMI's. However, there were no follow-through gains. EUR/USD basically hovered in the 1.16 big figure. Political noise in Germany and Italy caused ongoing investor caution on euro. Uncertainty on next steps in the US-China trade conflict also prevented investors to place directional bets in the USD or the euro. EUR/USD closed at 1.1651 (from 1.1604). USD/JPY finished the day little changed at 109.97.

Overnight, Asian markets mostly trade with a moderate risk-off bias. China outperforms slightly after the PBOC cut the reserve requirement ratio for some banks. The Yuan weakens further (USD/CNY 6.5320). At the same time, the trade conflict might move to a next phase. US officials and press reports indicate that the US will take action to prevent US technology transfers to China. Chinese companies might be blocked from buying US tech companies and the US might install controls on technology exports to China. USD/JPY is drifting further below the 110 mark (currently 109.50). EUR/USD stabilizes in the mid 1.16 area.

Today, German IFO sentiment will be published. A further decline might be a euro negative. Europe also still has to cope with several issues (migration) going into this week's EU summit. Next steps in the US-China trade conflict will continue to affect global market sentiment. Of late, rising trade tensions were often a negative for the euro rather than for the dollar (except for USD/JPY). In this context (data, European politics and trade tensions) we don't see much further upside fur EUR/USD. Last week, we advocated that any sustained EUR/USD comeback would be difficult for now, as investors still adapt positions to the ‘new' policy divergence between the Fed and the ECB as it became clear after the Fed and ECB meetings. End last week, EUR/USD rebounded of the 1.1510 support. This gave some temporarily relief to the euro, but we don't expect this move to go really far.

In technical trade sterling stayed in the defensive on Friday. EUR/GBP closed the session in the high 0.87 area. Thursday's ‘hawkish BoE voting' didn't help sterling much. There are few really important UK eco data this week. Assuming a cautious risk-off context, we expect no sustained sterling gains. Brexit noise will also likely persist. On the other hand, several BoE members (mostly ‘hawks') will speak this week. We assume more sideways trading in EUR/GBP near the 0.88 pivot.

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KBC Market Research Desk

KBC Bank

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