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Aug 01 - 11:55 AM

EUR/USD - COMMENT-EUR/USD Still Shackled To Yuan, Yield Influences

By Christopher Romano  —  Aug 01 - 09:35 AM

EUR/USD is trading lower Tuesday and the slide may deepen as influences from China's yuan and U.S. interest rates hold sway for now.

The euro and China's yuan are typically correlated in that they move in the same direction against the U.S. dollar.

Recent yuan appreciation against the dollar stalled then reversed slightly.
Investor concerns that China's economy may be faltering is driving yuan selling.
The July Caixin manufacturing PMI reinforced views of slower growth as manufacturing fell into contraction.

Recent euro zone data indicated growth remains fragile while inflation appears to be slowing.
The combination may lead to a less hawkish ECB stance which would weigh on euro zone rates and EUR/USD.

yields remain elevated as investors increasingly expect the Fed to remain higher for longer.

As a result, the dollar's yield advantage over the euro is increasing again.
With this, U.S.-German two year spreads US2DE2=RR are trending wider in the dollar's favor.

Key U.S. data risks are in focus.
July ISM services PMI, ADP, CPI and payrolls are due.
Upbeat data should buoy U.S. rates and the dollar.

Should USD/CNH continue to rally and U.S.-German spreads widen further, EUR/USD should remain on a downward trajectory.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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