USD looking for direction as risk-off persists

KBC Market Research Desk KBC Bank

Global volatility eased (temporarily) yesterday. US markets were closed in honor of former president Bush. Sentiment stayed risk-off but the pace of the sell-off slowed. EUR/USD bottomed after Tuesday’s intraday slide. The news flow from Europe was also mildly euro supportive. The EMU PMI’s were slightly better than expected. Headlines suggested that Italy and the EU are making progress to find a compromise on the Italian budget. In the Fed Beige book, most Fed districts see ongoing modest to moderate growth. Labour shortages and price pressures due to higher tariffs are a concern. The trade-weighted dollar finished marginally stronger near the 97 handle. EUR/USD was little changed (1.1344). The yen returned part of Tuesday’s risk-off gain. USD/JPY rebounded (113.19 from 112.77). Overnight, global sentiment turned again outright risk-off. The flattening of the US yield curve resumes. Canada arrested the CFO of Huawei and might extradite her to the US. The case suggests that there is little improvement in the US-China trade relationship despite Saturday’s meeting between Presidents Trump and XI Jinping. Asian equities are again deep in the red, with losses in China mounting close to 3%. EUR/USD still lacks any directional tendency holding in the mid 1.13 area. The yen strengthens below 113 (112.75 currently). The yuan weakens modestly. The Aussie dollar extends this week’s decline after disappointing trade data. Today, The ISM, the ADP labour report, jobless claims and trade balance data might move the dollar intraday. FX traders will also keep an eye at the OPEC meeting. However, global (FX) markets will stay focused on the US yield curve. The context of at the same time global uncertainty and declining US yields (and a flattening yield curve) is ambiguous for EUR/USD. In case of a new risk-off episode, some EUR/USD downside drift might be on the cards, despite a narrowing of the US-EMU interest rate differential (spill-over from EUR/JPY-USD/JPY selling). Still the 1.12/1.15 range looks solid.

Sterling gained temporarily ground yesterday despite a poor UK PMI. The Brexit debate in Parliament continued. Over the previous days chances on no Brexit looked to have grown slightly. However, the outcome of the process remains highly uncertain/binary in nature. EUR/GBP finished little changed near 0.89. Headlines from the Brexit debate in parliament will continue to drive EUR/GBP trading today. For now, we see no trigger for a sustained sterling comeback.

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KBC Market Research Desk

KBC Bank

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