FX Daily: “Risk on, risk off” sentiment again (Philip Wee)

Resistance around 1.1840 for EUR, 1.3750 for GBP.
Philip Wee22 Jul 2021
    Photo credit: Unsplash Photo

    Currencies will be driven by “risk on, risk off” sentiment. Dow, S&P 500 and Nasdaq Composite rose a second day by 0.8% to 0.9% after Monday’s sell-off. VIX volatility index eased to 17.9 from 19.7 but could still return above 20 again. The US 10-year treasury yield recovered a second day to 1.29% and needs to avoid closing the week below 1.20%. Sentiment is still weak for AUD and NZD despite failed attempts in the past two days to break below 0.73 and 0.69 respectively. USD/CAD fell on profit-taking to below 1.26 after it failed to break above 1.28 last Friday. Consensus expects US initial jobless claims to fall to 350k in the week ended 16 July. DXY index returned below 93.0 but is still supported around 92.8. 

    EUR is depreciating in a trend channel in July towards 1.17, the year’s lowest level. Going into the European Central Bank governing council meeting today, speculators are looking for a short-term bounce from the 1.1750 floor towards the 1.1860 ceiling, but are also mindful of a resistance at 1.1840, its 20-day moving average. EUR bulls will be disappointed if the ECB sounds patient in rolling back its crisis measures, implied from its adoption of a symmetric 2% inflation target and its emphasis on maintaining favourable financial conditions. ECB President Christine Lagarde is “guardedly optimistic” about the recovery because the delta-variant of Covid-19 poses a challenge to reopen economies. Although the pandemic emergency purchase programme is scheduled to end in March 2022, the ECB will stress the need for policy to be flexible and keep the door open for fresh measures to support the recovery if needed.

    GBP’s upside is capped around 1.3750-1.3800 after it bounced off the 1.36 support. Bank of England Deputy Governor Ben Broadbent will be delivering a speech entitled “Mismatch” today. He is expected to be cautious about the recovery where growth may have peaked amidst rising inflation and increasing infections. Despite its rebound yesterday, the FTSE 100 index has yet to return into the 7000-7200 range of the past 1-2 months. UK GDP slowed a second month to 0.8% MoM in May from its peak of 2.4% in March. Headline and core CPI inflation were above the 2% inflation target to 2.5% YoY and 2.3% in June. The BOE is split between tapering asset purchases and premature tightening at its next meeting on 5 August.

    Philip Wee

    FX Strategist - G3 & Asia
    p[email protected]

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