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Currency Market Analysis

Jul 23, 2020 | Currency Market Analysis

Global Themes

  • Dollar softens as US-China tensions escalate
  • No US or EU trade deal?
  • Euro euphoria continues


Dollar softens as US-China tensions escalate

Diplomatic tensions between the world’s two largest economies continue to boil with the Trump Administration now closing the Chinese consulate in Houston. China has condemned the move and has threatened retaliation. The US Dollar continues to weaken across the board and the dollar index is on the brink of falling close to 2-year lows.

The spike in risk appetite has dominated financial markets over recent weeks on the hopes of a Covid-19 vaccine and the prospect of more stimulus measures to support economies worldwide. However, capping this risk sentiment has been the deteriorating US-China relations and with the US lobbying its allies to take firmer action against China too, investors will likely remain cautious and assess whether these geopolitical tensions will be enough to derail the market optimism.

  • The weaker US Dollar allowed EUR/USD to climb to fresh 19-week highs yesterday and the currency pair looks poised to test $1.16 today. GBP/USD rebounded from intra-day lows of $1.2640, to end the day nearly 100 pips higher and back above the pivotal 200-day moving average.

No US or EU trade deal?

The British Pound took a tumble yesterday following renewed risk aversion amid rising geopolitical tensions and the increasing concern that the Brexit transition period might end without a trade deal between the UK and EU. A UK-US trade deal also looks doubtful ahead of the US election in November.

One of the reasons sterling fell abruptly against most of its peers yesterday was the rumour that the UK government is now working on the assumption that there won’t be a trade deal with the EU before the end of the year. The bid to intensify talks, after no request to extend the transition period, has yet to show positive results and the government continues to urge businesses to prepare for a no-deal scenario, whereby the UK defaults onto World trade Organisation rules. Such a scenario is expected to send GBP/USD back under $1.20 and GBP/EUR potentially to parity.

  • Meanwhile, the UK government has also stated a UK-US trade deal is unlikely to be reached this year as well because the coronavirus outbreak has sapped all the energy and resources from both sides. Sterling remains stronger versus the US currency though as the dollar sell-off has accelerated.

Euro euphoria continues

The Euro continues to outperform many of its major peers, notably the US Dollar, as EUR/USD is on track for a fifth consecutive daily uplift. GBP/EUR teeters on the familiar and supportive €1.10 handle with eyes on a close below the €1.0990 mark that would indicate a break below the ascending trend line from the March low.

The EU’s historic €750bn coronavirus recovery fund was eventually agreed on Monday morning and the Euro has remained strong since. It was a landmark occasion for European integration and will help counter the economic strains in the single market, caused by the pandemic, by allowing all EU governments to support workers and businesses through these challenging times. The upbeat news saw demand for the common currency soar and it now trades over 3% higher against the dollar year-to-date and nearly 7% higher versus sterling year-to-date.

  • Today, market participants will keep a close eye on flash Eurozone consumer confidence data at 15:00, which is expected to have improved slightly from the June result. Flash PMIs from Europe will be a key focus early tomorrow morning.

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