EUR/USD pressured despite risk-on mood, US dollar remains firm

At 1.0151, EUR/USD is under pressure by 0.14% and has fallen from a high of 1.0210 to a low of 1.0122. On Wednesday, US stock futures rose as investor apprehension over hostile US-China relations subsided, yet the euro remains on the backfoot with the greenback firm due to US treasuries declining as a result of hawkish Federal Reserve comments. 

Markets have been calmer since US House Speaker Nancy Pelosi returned from a trip to Taiwan that sparked a furious response from China. US stocks on Wall Street have advanced with government bond yields after a services gauge unexpectedly advanced and new orders for factory goods beat expectations. This has implied that the projected hike in interest rates this year may not necessarily coincide with an economy in recession, a relief for risk assets in general. 

On Tuesday, risk-off tones had been spurred by Fed officials saying the central bank has some distance to go to contain inflation. This resulted in the two-year treasury yield surging through 3% as traders reduced their bets on policy easing in 2023. Nevertheless, the USD dollar index, which tracks the greenback against six major peers, has softened from a two-decade high in mid-July as investors reined in expectations of Fed rate hikes.

Fed speak conflicting

The US dollar has fallen from the 109 area down to a recent low of 105.97 over the course of two weeks. Nevertheless, a trio of Fed officials signalled on Tuesday the central bank remains "completely united" on increasing rates to a level that will put a dent in the highest US inflation since the 1980s. This has given the greenback a booster and lifted it to 106.819 over the course of the past few sessions.

Meanwhile, San Francisco Fed President Mary Daly said On Wednesday that 50 basis points would be a reasonable thing to do in September. ''We have a lot in the pipeline in tightening but yet to see that in data showing a slowing of the economy, but if we see inflation roaring ahead undauntedly then perhaps 75 be more appropriate.'' US rate futures pared back 75bp view in Sept after Fed's Daly comments. 

Meanwhile, US Nonfarm Payrolls this Friday followed by Consumer Price Index on August 10 will help set the tone for the greenback. The consensus for Nonfarm Payrolls is 250k. That is down from 372k in June. The Unemployment Rate is expected to fall in at 3.6%.

EUR shorts packing up

As for positioning, speculators’ net EUR short positions have moved lower slightly ahead of the surge the previous week. 

''Speculators have been edgy recently given concerns related to gas shortages in Europe during the winter and fears that industry may suffer rationing. This scenario could focus the market on fragmentation risks, though reassurances have been provided by the Brothers of Italy party that reformist policies would be retained if it did well in the election,'' analysts at Rabobank explained.