Euro sentiment remained strong during Wednesday with further positive sentiment after the recovery fund deal.

Euro sentiment remained strong during Wednesday with further positive sentiment after the recovery fund deal. The dollar also remained on the defensive with a lack of yield support and unease over underlying fundamentals.

EUR/USD strengthened to 18-month highs at 1.1600 before correcting slightly. Risk appetite was jolted by a further increase in US-China tensions. Global equity markets still held relatively steady with US gains helping to limit global bourses to slight losses.

Sterling managed to regain ground during the day with GBP/USD close to 5-week highs near 1.2750 despite fundamental reservations. Commodity currencies posted net gains despite some unease over risk conditions.

Following Tuesday’s deal on the EU recovery fund, overall confidence in the Euro-zone and Euro remained stronger. Investors consider that the risk of a break-up had declined sharply there are also expectations of increased long-term capital inflows. These positive factors have also encouraged short-term funds into the single currency, although speculative positioning is already high which will limit the scope for further buying.

There was an element of caution given that the deal needs to secure parliamentary approval with reports that the EU legislature would look to amend the agreement. Nevertheless, overall Euro sentiment continued to strengthen, especially given a lack of US confidence.

Existing home sales strengthened to an annual rate of 4.72mn for June from 3.91mn previously, although the rate was slightly below market expectations.

Expectations that real US yields would remain negative continued to sap underlying dollar support, especially with the Federal Reserve committed to a very expansionary policy over the medium term. There was also further speculation that the central bank could engage in yield control. The real yield declined to -0.88% on Thursday, the weakest reading since 2012, which will continue to sap US currency support with the currency at 4-month lows.

The Euro maintained a strong underlying tone and EUR/USD strengthened to 21-month highs at 1.1600 before correcting to the 1.1570 area.

There was choppy trading during the day and overall market volatility is liable to increase, especially given the impact of low trading volumes during the holiday period. EUR/USD traded around 1.1585 on Thursday as underlying dollar sentiment remained negative and German consumer confidence recovered strongly for July.

Risk appetite dipped early in Wednesday’s European session following reports that the US had ordered the Chinese consulate in the US city of Houston to close. The yuan also dipped sharply lower as Beijing threatened to shut the US consulate in Wuhan as retaliation. The overall impact was short lived, although markets will inevitably be monitoring political risk closely, especially given the US election campaign.

Overall risk appetite recovered into the New York open and the yen gradually lost support with USD/JPY moving above the 107.00 level. There was further uncertainty over US fiscal policy with inevitable congressional wrangling over support measures amid fears that there will be economic disruption in August.

The CDC reported an increase in new coronavirus cases to 63,000 in the latest 24 hour period from below 58,000 previously with California reporting a record daily increase in infections of over 12,000. There were further concerns over the impact on consumer confidence and the US outlook.

Tensions with China remained a significant market focus with reports that China will close the US consulate office in Chengdu. Japanese markets were closed for a holiday on Thursday, limiting activity with USD/JPY around 107.15 as markets monitored Chinese yuan developments and wider trends in risk appetite.

Overall confidence in the UK economic outlook remained weak on Wednesday with further concerns over the labour market and underlying recovery profile.

There were also underlying concerns over the trade outlook with the latest round of negotiations with the EU set to end on Thursday. Overall rhetoric has been notably downbeat, maintaining market concerns over the outcome. At best, there is likely to be further delay to reaching agreement which will reinforce logistical difficulties for UK exporters. Risk conditions remained important for overall Sterling trends and the UK currency dipped sharply as risk appetite dipped in early Europe with a GBP/USD retreat to lows just below 1.2650 while GBP/EUR held near 1.1000.

Economic Calendar

07:00German GfK Consumer Confidence (AUG)-5-9.4
10:00ECB Luis De Guindos Speaks--
11:00GBP CBI Industrial Trends Orders (JUL)--58
12:00Bank of England (BoE) Monetary Policy Committee (MPC) Member Jonathan Haskel Speaks--
13:30USD Continuing Jobless Claims17067K17338K
13:30USD Initial Jobless Claims1300K1300K
23:45NZD Trade Balance (Y/Y)(JUN)--1330M
23:45NZD Trade Balance (M/M)(JUN)-1253M

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.