Yesterday, calm returned to global markets. Tentative signs that the US and China might return to the negotiation table reversed Wednesday’s risk-off trade. Still, the risk rebound didn’t hurt the dollar much. Interest rate differentials widened slightly in favour of the USD. US inflation rose further north of 2% reaching 2.9% Y/Y. The US 2-y yield nears the cycle top. EUR/USD finished little changed at 1.1672. USD/JPY extended Wednesday’s upside break and closed the day at 112.55.
This morning, most Asian equities mostly join the risk rebound with China still underperforming. Yesterday’s global FX ‘trends’ remain more or less in place. The CNY is holding rather soft (USD/CNY 6.67). The dollar remains well bid. EUR/USD is changing hands in the 1.1655 area. USD/.JPY gains a few more tics (112.70 area). Overnight, Fed Powell remained optimistic on the US economy and saw no reason for the Fed to change to path of gradual policy normalisation. Today, US import prices and Michigan consumer confidence will be published.
Markets will also keep an eye at the first bank earnings. Michigan confidence is expected little changed at a high level (98 from 98.2). Corporate earnings are expected strong. Interesting to see firms forward guidance and the subsequent market reaction. Markets apparently assume that the US economy is rather resilient for impact of the trade war. In this context, positive US earnings and US equity outperforms shouldn’t be too negative for the dollar. Yesterday, we indicated that the day-to-day momentum of the USD improved. This is still, the case. However, in somewhat broader perspective we keep the working hypothesis that the EUR/USD 1.15 range bottom is solid. USD/JPY confirmed the break 111.40 with further gains.
Yesterday, the publication of the White Paper on the UK Brexit strategy didn’t change fortunes for sterling in any profound way. The plan aims for a relatively soft Brexit (at least for goods) but political hurdles remain high. Sterling regained a few ticks against the euro, but the gains could not be sustained. Overnight sterling even lost slightly further ground after a press interview of Donald Trump. He said the soft Brexit plan could kill a trade deal with the US and supported Boris Johnson in his political battle with May. For now, we still don’t see a trigger for a sustained GBP comeback. More sideways EUR/GBP trading might be on the cards.
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