Dollar declines even as sentiment turns risk-off

KBC Market Research Desk KBC Bank

The dollar rebound ran into resistance yesterday. Trading was mostly technical in nature. Still, slightly higher than expected EMU headline inflation (1.3% Y/Y) maybe helped stopping the EUR/USD downside drift. The pair bottomed in the 1.12 area. Later in the session, a further decline in US yields finally also weighed on the dollar. EUR/USD finished at 1.1224 (from 1.1211). Deepening US equity losses pushed USD/JPY back below the 108 handle (close at 107.95).

Investor sentiment is deteriorating further in Asia. Investors fear disappointing corporate earnings. Trade talks between the US and China are said to be deadlocked on the US restrictions versus Huawei. Japan June trade data disappointed (both imports and exports declined). A surprise Bank of Korea rate cut fails to change investor sentiment for the better. The yen is also well bid. USD/JPY extends its decline (currently 107.70 area). The dollar is also ceding modest ground against the euro with EUR/USD trading in the 1.1240 area.
Later today, there are no EMU data. The US Philly Fed business outlook is expected to improve (5.0 from 0.3) and jobless claims to stay low (216k). However, even a positive US data surprise probably won’t change investors’ mindset. Earnings and equity sentiment will set the tone for trading. A risk-off correction might incur further USD/JPY losses. The impact on EUR/USD is less straightforward. European assets often underperform in a risk-off context. At the same time, the low-yielding euro is an important funding currency for carry trades. Unwinding of those trades might cause euro buying. Lower US yields are a USD-negative too. The jury is still out, but the EUR/USD 1.1181 support looks solid short-term. Global picture: EUR/USD drifted lower in the 1.11/1.14 range but rebounded (temporary?) after Powell paved the way for a July rate cut. A rebound to the 1.13 would further ease the downside momentum. With the most important data before the July FOMC meeting printed, more trading near current levels is likely.

Sterling remained in the defensive yesterdat as investors see a growing chance that the political turmoil might finally lead to a no deal Brexit This sentiment was reinforced by comments of Brexit Secretary Barclay as he said that the risk of a no-deal Brexit is ‘underpriced’. EUR/GBP retained recent gains and hovered lower half of the 0.90 big figure. Today, UK June retail sales are expected to show a third consecutive monthly decline. Even in case of a positive surprise, we expect any GBP-rebound to stay limited as Brexit uncertainty continues to dominate.

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KBC Market Research Desk

KBC Bank

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