(Trade-weighted) USD stabilizes as FX stress eases

KBC Market Research Desk KBC Bank

Trading on global markets developed in a rather calm, orderly fashion yesterday and this bias was also visible in the currency markets. The euro spiked temporarily lower early in the session on the confirmation that the EU finance ministers failed to reach an agreement on a fiscal response to corona on an EU level. However, there was no follow-through price action. Intra-EMU spreads gradually eased from an initial widening and EUR/USD settled in a sideways trading pattern in the mid 1.08 area (close 1.0858). The trade-weighted dollar stabilized in the lower half of the 100 big figure. An ongoing positive sentiment, in particular in US equity markets, prevented a new USD rebound. Smaller currencies mostly also maintained Thursday’s gains. At least for now, it looks that the level of stress in global FX markets is easing.

This morning, Asian equity markets mostly show modest gains with Japan underperforming. Sentiment remains constructive even as news on the development of the coronavirus is mixed at best (e.g. Singapore). The trade-weighted dollar (DXY) is holding just north of the 100 level. USD/JPY (108.95) is trading with a mildly positive bias, but holding with its short-term consolidation pattern. The Aussie dollar maintains recent constructive bias and regained the 0.62 level.

Today, the US jobless claims and consumer confidence deserve some attention. However, of late, poor US data seldomly were a negative for the USD. Fed’s Powell giving an economic update is a wild card. The discussion on the EU fiscal response remains a (modest) euro negative, but we maintain the view that global risk sentiment and the overall risk-on/off dynamics in global USD trading remains a main driver for EUR/USD trading. Last week, EUR/USD falling below 1.09 deteriorated the technical picture. The pair tested 1.0775/70 support, but no clear break occurred. The March low comes in at 1.0636. We continue to watch the TW USD. The USD might stay well bid, but we don’t expect a rebreak beyond 103. EUR/USD rebounding above the 1.0950 area would be a first sign of improvement. In a day-to-day perspective, investor caution going into the long weekend might be slightly USD positive.

Yesterday, EUR/GBP returned to 0.8750 area, but recent lows/support survived. GBP (cable) trading is also USD driven. Even so, sterling recently often outperformed against the euro when the dollar declined. We don’t see strong (economic) reasons for a further EUR/GBP decline, but a break below 0.8740 would be technically relevant.

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KBC Market Research Desk

KBC Bank

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