EUR/USD initially hovered in a tight range in the 1.12 area yesterday as markets pondered the consequences of recent developments in the trade war saga. Risk sentiment improved in the run-up to the US session. US eco data were better than expected. US yields rose. A wider US-German yield spread finally tilted the balance in favour of the dollar. EUR/USD dropped below 1.12 to close the session at 1.11.74. USD/JPY also profited from the equity rally and closed at 109.85.
This morning, Asian markets are mixed with China underperforming. Yesterday's relative trade optimism is again questioned this morning as a China government related source questioned whether it is appropriate for China to continue trade talks under current threats from the US. At the same time, the comment suggested that China might step efforts to support growth. The yuan is ceding further ground. USD/CNY jumped above the 6.90 barrier this morning. USD/JPY touched the 110 area this morning, but reversed initial gains (currently at 109.65). EUR/USD hovers in the 1.1175 area. AUD/USD slipped below the 0.69 level as the country is headed for elections this weekend.
Later today, the EMU final April CPI (expected at 1.7% headline and 1.2% core) is published. In the US, the Michigan consumer confidence is expected to stabilize at a decent level. At the same time, this morning's price action suggest that it won't be easy for the risk rally to continue.
Over the previous days the dollar (temporary)?) outperformed the yen and the euro. Yesterday, the dollar was supported by a rebound in US yields both due to good US eco data and a better risk sentiment. Especially, the risk context suggests that further USD interest rate support won't be that evident. If so, it is in the first place a negative for USD/JPY. The picture for EUR/USD is more mixed. Selling pressure from EUR/JPY might make a EUR/USD rebound more difficult. Even so, we maintain the working hypothesis that the EUR/USD 1.1110 level won't be easy to break without real negative EMU news. Sterling lost further ground yesterday as the debate on the departure/ succession of UK PM May as leader of the conservative party continues. The outcome of the process and its consequences for Brexit are highly uncertain and this continues to weigh on sterling. EUR/GBP settled above the 0.8723 previous ST range top. May will try a last attempt to get her deal approved early June, but markets are not convinced it will succeed. Sterling will probably stay in the defensive.
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