USD decline shows tentative signs of slowing

An outright risk-on initially triggered further USD selling yesterday. EUR/USD tested the mid 1.14 area. Interestingly, USD/JPY also followed the broader USD downtrend. US data including Empire manufacturing survey and production data were better than expected, but didn't help the dollar. The TW dollar (DXY) came within reach of the key 95.72 support, but a real test didn't occur. Later, equities stayed in positive territory, but uncertainty on the next phase in the pandemic prevented an acceleration of the risk-on. EUR/USD closed at 1.1412, off the day top. USD/JPY closed near 107 after filling bids in the 106.70 area earlier.

This morning, Asian equities are falling prey to profit taking. China Q2 GDP printed stronger than expected (3.2% Y/Y), but slightly weaker than expected June China retail sales dampened optimism. The TW dollar returned to the 96 area late yesterday and extends its comeback this morning. EUR/USD struggles not to fall back below 1.14. Australia labour market data were mixed. However, together with a broader USD rebound, they weren't good enough to keep AUD/USD north of the 0.70.
Today, the ECB policy decision is the key for EMU markets. In US the June retail sales, the Philly Fed outlook and jobless claims all are worth monitoring. US data are expected to show the positive impact of the reopening of the economy. Question is whether this is sustainable given the rise in US infections. Even solid US data probably will have little (positive) impact on the USD. We expect ECB's Lagarde to err to the side of caution and keep to door open for more easing. A less dovish stance probably will be negative rather than a positive for the euro. Of late, the dollar developed a gradual downtrend. At the same time, the euro was well bid too. There is no obvious trigger to row against this trend, but a pause might be on the cards. The pair recently was captured in buy-on-dips pattern. 1.1422 was extensively tested, but the move is running into resistance. A break toward the 1.1495 top probably needs help from a positive EU summit. EUR/GBP yesterday entered some ST consolidation modus after rather steep sterling losses on Tuesday. The pair settled in the mid 0.90 area. This morning, UK labour data show less job losses than expected/feared, however this real impact still has to become apparent when government support schemes will be scaled back. We see no obvious trigger for sustained sterling gains, especially not if sentiment turns more cautious. 0.90 should be solid support ST.

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