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USD goes from strength to strength

Market Analysis

EURUSD, Daily               

The USD index clocked a new 13.5-year high in what is among the top 10 longest winning streaks the greenback has seen in 50 years.  The dollar subsequently corrected some during the London AM session. EURUSD settled to near net unchanged levels around 1.0620-25 after earlier logging a new 11-month low at 1.0581. USDJPY, which continued to play a lead role in dollar gains, hit a five-month peak at 110.92 before ebbing to the 110.40 area.

USDJPY continued to lead a broader Trumpflation dollar rally, gaining a further 0.5% in Tokyo, logging a fresh five-month peak at 110.78.  While the dollar has been outperforming, the yen has been underperforming, propelling EURJPY and AUDJPY to respective four- and seven-month highs today.  The BoJ’s wheeling out of “yield curve control” yesterday, pledging unlimited purchases of government paper of 1- to 5-year maturities is a factor, was backed up by remarks form central bank governor, Kuroda, today, who pledged that the Japanese yield curve will kept at “appropriate” levels.  Kuroda also suggested, earlier in the week, that the negative interest rates could be cut further. There are clear bullish tendencies for USDJPY.  The 2016 high at 121.68, seen back in late January, provides framework.

EURUSD has remained heavy after hitting a new 11-month low of 1.0581 during the Asia session, capping the longest losing streak the pair has seen since the euro was launched in 1999. While mostly a reflection of dollar outperformance (the euro has fared better against the yen and some other currencies), the perceived populist threat to the integrity of the EU and Eurozone has been in the mix of market narratives. Again there are clear brearish tendencies for EURUSD given dollar-lifting prospects for Trump tax cuts, infrastructure spending and deregulation, while are likely to be accompanied with tighter monetary policy from the Fed. This comes with U.S. fundamentals already looking pretty good, with Q3 growth forecast at 3% and there being signs of a sustained pick up in Q4. U.S. inflation is also on the rise, fulfilling the second half of the Fed’s mandate. Initial EURUSD resistance is now at 1.0650-66. The low from last December, at 1.0523, provides the next downside waypoint of note.

Sterling has continued to trade firmly versus most currencies, ex-dollar, with the BoE’s neutral policy stance contrasting to the ECB, BoJ and some other central banks. The pound is modestly up against the euro and yen today, and while down by 1.5% w/w to the dollar presently, up by 0.9% w/w versus the euro and by 2.1% w/w against the euro. BoE’s Broadbent warned today of “significant upward pressure on import prices” while repeating the central bank’s new line that it will not be too tolerant of above-target inflation. Sterling looks to have found stability, but remains about 16-17% below levels prevailing ahead of the late-June Brexit vote. I still expect Cable’s directional bias to remain to the downside on expectations for reflationary fiscal policy in the U.S. and consequential expectations for tighter monetary policy.

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Stuart Cowell

Market Analyst