EUR/USD bulls step in and the price stablises as US dollar bid stalls

EUR/USD is trading around 1.0520 in early Asia following a choppy Tuesday on the back of a firmer US dollar, China relaxing its rigid COVID protocols coupled with disappointing US consumer sentiment data and central bank rhetoric. 

'' As quarter-end fast approaches, markets are becoming desensitised to Fed speak in the very short term. The FOMC has laid out its broad strategy for tackling inflation,'' analysts at ANZ Bank argued. ''The debate over whether the Federal Reserve will raise by 50 or 75bps at the 26-27 July meeting and the eventual peak in the fed funds rate will very much depend on the path of the data and how quickly the economy decelerates.''

''New data is needed; more words add limited value at this point. Markets are therefore consolidating within established price ranges but primary trends remain intact.''

Federal Reserve officials downplayed the risk of the US economy entering a recession, despite raising rates by 75 basis points this month and another 75 basis points next month. Both New York Fed President John Williams and San Francisco Fed President Mary Daly acknowledged the need to reduce inflation but insisted that a soft landing was still possible.

A key set of rates that the Fed is focusing on to help judge financial conditions is still a long way from reaching levels that would prompt officials to abandon their tightening plans. Adjusted for inflation rates at the short end of the curve remain below zero, despite real rates on longer-term securities reaching levels not seen since 2019.

On Tuesday, the US dollar shot higher from below 104, making gold more expensive for international buyers. US dollar bulls moved in on euro weakness as European Central Bank (ECB) President Christine Lagarde offered no fresh insight into the central bank's policy outlook. Lagarde said the central bank would move gradually but with the option to act decisively on any deterioration in medium-term inflation, especially if there were signs of a de-anchoring of inflation expectations. The US dollar index (DXY), which had made a two-decade high of 105.79 this month, was last up 0.46% at 104.42. The DXY had been as low as 103.77 and as high as 104.60. 

Meanwhile, favourable to risk sentiment is the fact that China made the greatest change yet to a pandemic policy that has isolated the nation and spurred economic worries by halving the amount of time new immigrants must spend in isolation. However, data in the US nipped the cheer in the bid and this was followed by a sell-off in big tech that weighed heavily on stocks.  A measure of expectations, which reflects a six-month outlook, has fallen to a nearly decade low. ''The data comes at a time when analysts are still optimistic about corporate earnings, with net-margin estimates for S&P 500 companies at an all-time high,'' Reuters reported.