USD going nowhere as trade tensions are ‘easing‘

KBC Market Research Desk KBC Bank

On Wednesday, the dollar continued an inconclusive trading pattern. Markets reacted muted to the ‘escalation' in the US-China trade conflict with no meaningful safe haven bid for the dollar. US housing data were mixed and aren't the focus for USD trading. US/German interest rate differentials held near a multi-year peak, but the spread hardly moved. EUR/USD came again close to the 1.1720 area but a test of the 1.1733 resistance still didn't occur. Sentiment on Italy turned more neutral and was no support for EUR/USD anymore. EUR/USD closed the session little changed at 1.1673. USD/JPY ended the day at 112.28, from 112.36.

Overnight, Asian equities are trading mixed to slightly lower. Trade is moving to the background as a driver for trading. Pressure on most EM currencies is easing (slightly). For now, there are few high profile data or events to provide clear guidance. The Kiwi dollar extended this week's rebound supported by stronger than expected Q2 growth (1.0% Q/Q and 2.8% Y/Y). NZD/USD is trading in the mid 0.66 area. Today, the calendar is moderately interesting with the EC consumer confidence in EMU. In the US the jobless claims, Philly Fed business outlook and existing home sales will be published. The data probably won't change the positive view on the US economy but are no market movers. So, global risk sentiment and interest rate developments will continue to guide USD trading. Sentiment is neutral/cautious. Will the dollar get any additional support as (US) interest rates are keeping an upward bias going into next week's Fed decision? Markets are embracing the scenario of two additional Fed hikes this year. Short-term, we keep a neutral bias on EUR/USD until it becomes clear which narrative will prevail as driver for FX trading. 1.1733/50/91 resistance is the first topside reference. EUR/USD 1.1525/30 is a first intermediate support.

Yesterday, EUR/GBP remained locked in a tight range close to, mostly slightly below 0.89. US CPI was higher than expected, but with no lasting support for sterling. Brexit headlines remained diffuse. Today, August retail sales are expected to decline slightly after strong July sales. Markets will keep a close eye on the comments coming from the EU Summit in Salzburg. For now, there are still few indications that the EU/UK will be able to unlock the Brexit stalemate. A surprise is always possible, but for now we don't anticipate high profile sterling positive news.

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KBC Market Research Desk

KBC Bank

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