FX Daily: Relief rally, no clear trend yet (Philip Wee)

USD lower on relief rally, road ahead is still muddy
Philip Wee30 Jul 2021
    Photo credit: Unsplash Photo

    Wall Street followed through with the rebound in Asia and Europe. Dow and S&P hit lifetime highs within the session after China calmed markets. The Fed’s less hawkish slant at the FOMC meeting played a role too. Markets hope July would end with fresh record closes too. Unfortunately, the landscape has become less clear and the road muddied. The synchronized global recovery story is no longer evident in IMF’s latest forecasts which now favor brighter prospects for Developed Market economies and dimmer outlooks for Emerging Markets. Rising Covid-19 infections from the Delta variant have dampened hopes for a complete economic recovery, with the realization that it was easier to close than to reopen economies. Despite the rebound led by Chinese stocks, markets are still vigilant against more clampdowns in China and the hardening in US-China rivalry. In the US, there was bipartisan support (Senate voted 67-32) to advance the US infrastructure bill but not another extension to suspend the federal debt limit beyond its expiry on 31 July. Congress will only debate infrastructure bill after it returns from recess in August, targeting passage this autumn. Meanwhile, the US Treasury Department will resort to extraordinary measures to keep government offices open and pay government debts until it runs out of money in October (estimated by the Congressional Budget Office). 

    The greenback had its worst week in months. DXY retreated from 93 to 91.9 and could push lower. After the miss in US GDP, where growth increased by 6.5% qoq saar instead of the 8.4% expected for 2Q, EUR bulls are hoping for an upside surprise in EU data today. Consensus expects EU GDP growth to turn positive again by 1.5% QoQ sa in 2Q after its 0.3% contraction in 1Q. EU CPI estimate is expected to hit the 2% inflation target again in July after it slowed to 1.9% yoy in June. As always, consensus expects the EU unemployment rate to be unchanged from the previous month. It could surprise again by moving lower, as it did in May and June, to below 7.9% in July. EUR recovered from below 1.18 to 1.19 this week; the major resistance level is around 1.1970, where its 50- and 100-day moving averages are located.

    Similarly, USD bulls see strong support around 91.5, where the 100-day moving average is about to cut above its 50-day counterpart. Consensus expects US PCE inflation out today hit 4.0% yoy in June, for the first time since 2008. Fed officials are lining to speak after the FOMC blackout period, starting with a prominent hawk. St Louis Fed President James Bullard will be speaking on the US economy and monetary policy today. He believes that the Fed has achieved its goal of “substantial further progress” on inflation and employment and supports tapering asset purchases. Like it or not, the US 10-year treasury yield did firm to 1.27% from 1.23%, closer to Monday’s 1.29%. US nonfarm payrolls will be the big test next Friday.

    Philip Wee

    FX Strategist - G3 & Asia
    [email protected]

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