HomeContributorsFundamental AnalysisCurrencies: EUR/USD Nears 1.12. EUR/GBP Returns To 2016 Post Referendum Area

Currencies: EUR/USD Nears 1.12. EUR/GBP Returns To 2016 Post Referendum Area

  • Rates: US 10-yr yield tests 1.94% resistance
    Core bonds sold off during ECB President Lagarde’s inaugural Q&A session after the central bank’s policy meeting. However, all credit was due to US President Trump’s optimistic tweet on a phase one trade deal with China which could be presented in Washington as early as today. The US 10-yr yield tests 1.94% resistance.
  • Currencies: EUR/USD nears 1.12. EUR/GBP returns to 2016 post referendum area
    EUR/USD was supported overnight as cable jumped higher after the Conservative election victory in the UK. The announcement of a trade deal between the US and China for now is more mixed for EUR/USD. Even so, the short-term technical picture remains EUR/USD constructive.

The Sunrise Headlines

  • US equities jumped higher (up to 0.86%) and set new records as geopolitical tensions melted away, buoying sentiment. Asian equities are following track and colour green. Japan outperforms (+2.5%).
  • US president Trump signed off on a trade deal with China. The agreement averts a fresh round of US tariffs that were set to take effect on 15 December in return for Beijing’s promise to boost US farm product purchases in 2020.
  • UK PM Johnson and his Conservatives secured a crushing election victory and are forecast to win between 360-365 seats out of 650, crumbling Labour’s “red wall”. Johnson can now deliver on his promise and “get Brexit done”.
  • China’s Tewoo Group, a state-owned company, defaulted on its debt, dragging investors into losses. The default is the latest in a string of corporate delinquencies, prompting fears of a wave of defaults as the economy slows.
  • Confidence among Japanese manufacturers over the present and ST outlook deteriorated, the BoJ’s Tankan survey showed, while non-manufacturers’ sentiment appeared to weather the October’s sales tax hike hit.
  • The NY Fed plans to double its repo operations and raise the limits to some existing facilities over the end of the year to stave off a cash crunch. The operations may leave the Fed pumping almost half a trillion USD of ST liquidity.
  • Today, investors will scrutinize US retail sales to gauge whether the consumer still stands firm. The ECB’s Holzmann and the Fed’s Williams are due to speak today. Investors will keep an eye on additional trade deal/UK election details.

Currencies: EUR/USD Nears 1.12. EUR/GBP Returns To 2016 Post Referendum Area

EUR/GBP dropps to 2016 post-referendum area

Yesterday, the dollar initially traded soft but in tight ranges after a ‘soft’ message from Powell Wednesday. The first ECB meeting preceded by Christine Lagarde didn’t bring high profile news for FX traders. Later, the USD rebounded as president Trump tweeted that a trade deal was imminent. USD/JPY in particular profited from the trade headlines, breaking north of 109 to close at 109.31. The gain of the dollar against the euro was more modest. EUR/USD closed at 1.1130.

This morning, two big pending event risks for markets were ‘solved’. UK PM Johnson obtained a big majority, allowing him to get Brexit done. Later, headlines reported that US president Trump signed a phase-one trade deal with China, avoiding new tariffs on Chinese goods. A sharp rise of cable on the Tory victory also propelled EUR/USD close to the 1.12 level. The announcement of a trade deal had only limited impact on EUR/USD. The pair is trading in the 1.1165/70 area. USD/JPY is trading in the 109.60 area, but a test/break of the 109.73 ST top apparenlty isn’t that easy. The yuan gains further (USD/CNY 6.973).

Today, investors will try to assess the consequences of a trade truce and of Brexit happening soon. As such, the removal of those event risks is positive for risky assets. Question is how much good news is already discounted. In a first reaction, the dollar might stay in the defensive overall. The US retail sales to be published this afternoon are a wildcard.

EUR/USD this week reversed the post-payrolls downtick and broke above 1.11 as the Fed commited to stay accomdative for long. The ST technical picture improved. The 1.1179 resistance was temporarily (?) broken this morning. 1.1250 is the next resistance area. Some further EUR/USD gain is possible, but over time better EMU news is needed to continue this trend.

The convincing Tory victory brought EUR/GBP back to levels seen immediately after the Brexit referendum in 2016 (0.83 area). Cable tested the 1.35 area. Sterling already anticpated on a Tory victory. However, some further prosterling repositiong might still continue. Yesterday, we suggested some kind of sterling ‘sugar rally’ in case of a Conservative victory. For now, we don’t fight this market repositioning yet. A sustained break below 0.83 would also be signifcant from a technical point of view.

EUR/USD gains modestly from ‘Brexit solution’. Impact of trade truce modest, for now

KBC Bank
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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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