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Jul 21 - 04:55 PM

EUR/USD - COMMENT-US Recap: ECB Leaves EUR/USD Hanging

By Randolph Donney  —  Jul 21 - 03:05 PM

EUR/USD headed toward a flat close on Thursday after its brief rally in the wake of an unexpectedly aggressive 50bp ECB hike nL1N2Z20BK fizzled when President Christine Lagarde quashed speculation that the move signaled a higher rate path than previously assumed.

Disappointment and confusion over the bank's newly unveiled TPI plan to prevent potential bond-market turbulence also held EUR/USD back, as Italian spreads shot wider on news the country was headed toward a snap national election on Sept.
25 after Prime Minister Mario Draghi resigned.

Italy's political chaos will make it difficult to assess the TPI, a tool designed to help countries whose borrowing costs soar through no fault of their own nL8N2Z2681.

Disappointing U.S. jobless claims and Philly Fed should have supported EUR/USD, but the euro was weighed down by renewed energy uncertainty following the unimpressive resumption of natural gas flows through the Nord Stream 1 pipeline nL1N2Z2080.

Even after the ECB's jump start to tightening, markets project euro zone rates will still be 2.3% below fed funds by year-end.

EUR/USD eked gained 0.16% after the fleeting post-ECB rally to 1.0279, near kijun, 50% Fibo and 21-day moving average resistance unraveled.
It subsequently plunged to new Thursday lows at 1.10535 on EBS, with markets likely to focus on whether 10-year BTP-bund yield spreads rise above the 2.52% peak reached on June 14 before the ECB's emergency meeting on June 15 nL1N2Y214J to address the widening spreads.

USD/JPY fell 0.4% due to falling Treasury-JGB yield spreads, while the yen outperformed the dollar as a haven amid economic and political uncertainty from China to Europe to the U.S.

The key 2-year Treasury-JGB yield fell 10bp from Wednesday's close even after the BoJ reaffirmed its ultra-loose monetary policy despite Japanese inflation creeping above the 2% target nL1N2Z2005.

USD/JPY probed 10-DMA and tenkan props at 137.78/68.
With U.S. data missing forecasts with greater regularity and amplitude, USD/JPY pricing is likely to become more data dependent as markets refine Fed hiking bets nL1N2Z21AT.

USD/JPY's recent uptrend remains intact as long as it avoids closing below the 21-DMA at 136.70.

Sterling fell 0.05% after swinging in a 1.1891-1.2004 range, losing a brief post-ECB rally as UK has its own inflation, growth and political worries nL1N2Z217Y with the Fed still seen outpacing the BoE with rate hikes for now nL1N2Z214O.

The dollar was relatively flat against most other currencies, while bitcoin and ether softened amid a more risk-off backdrop.

Investors will scour Friday's global PMI reports for signs of slowing global growth.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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