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Jul 12 - 04:55 PM

EUR/USD - COMMENT-US Recap: Dollar Retreats After EUR/USD Holds Parity

By Randolph Donney  —  Jul 12 - 02:55 PM

EUR/USD rose on Tuesday after narrowly averting a fall to parity, holding firm at 1.00005 on EBS and triggering a pullback in the dollar as investors prepared for three days of high-profile economic reports that will shape market views on Fed rate hikes.

With an ECB meeting on July 21 and Fed rate decision on July 27, U.S. CPI, PPI and retail sales on Wednesday, Thursday and Friday will refine investors' views of the interest rate divergence that helped lift the dollar to two-decade highs.

Chinese COVID lockdowns nL1N2YT0E0 and dismal German investor sentiment nL8N2YT2FV also fueled earlier dollar gains, with those fears helped push 2-year bund-Treasury yield spreads down 6bp to their lowest since 2019.

But a stout defense at EUR/USD parity turned the tide against the dollar, though another test of that level may loom if the upcoming releases, including the Fed's beige book on Wednesday, support further aggressive U.S. rate hikes.

Meanwhile, the news flow remained euro-negative, with Italian Prime Minister Mario Draghi warning that he would leave office if the 5-Star Movement pulls out of his coalition nL8N2YT4EX.

Two-year BTP-bund yield spreads hit their widest since June 15 as investors responded to the potential for political instability to heighten fragmentation risk in the euro zone government bond market.

Natural gas supplies pose a further threat to the euro as markets nervously await the July 21 conclusion of the Nord Stream 1 maintenance shutdown nL1N2YS0B6.
Dutch natural gas prices widened to eight times those of U.S. prices.

EUR/USD was up 0.1% but may need a soft U.S. inflation report to avoid parity nL1N2YT15C.

USD/JPY fell 0.47% as Treasury-JGB yield spreads narrowed and the yen benefited from safe-haven gains while the dollar index was capped by EUR/USD holding parity.

and Japanese officials discussed USD/JPY's surge, but Treasury Secretary Janet Yellen said intervention was only warranted in "rare" cases nL1N2YT15C.

The pricing in of a sooner Fed funds peak and rate cuts next year has weighed on Treasury-JGB yield spread since the June Fed meeting, slowing the pace of USD/JPY gains nL1N2YT182.

Sterling was marginally higher, riding the coattails of EUR/USD's rebound from parity and a bounce off the lower 30-day Bolli, but the rebound is seen as corrective nL1N2YT12Q.

The 1.1807-1.1914 rebound came despite British political and economic uncertainty nL1N2YT16N and lingering doubts about how forceful the BoE will be in fighting inflation nL8N2YT4VM.

The dollar index hit a long-term upper target nL1N2YT13B before retreating.

Bitcoin and ether drifted closer to July lows.

Aside from Wednesday's US CPI report, the RBNZ and BoC are expected to hike rates 50bp and 75bp, respectively.

Investors will scrutinize the beige book to gauge the outlook for rate increases as deepening yield curve inversions and waning breakeven inflation pricing point to the Fed nearing the tightening finish line.

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Refinitiv IFR Research/Market Commentary


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