EUR / USD
The Euro maintained a strong tone into the New York open and continued to challenge the resistance area around 1.1900 as dollar sentiment remained very weak.
US housing starts strengthened to an annual rate of 1.50mn for July from 1.26mn the previous month and well above consensus forecasts of 1.24mn. Building permits also strengthened to 1.50mn from 1.26mn and above market expectations of 1.32mn.
Following the strong NAHB reading on Monday, the data reinforced expectations that the very low level of interest rates was boosting activity in the construction sector.
The dollar was unable to derive any support from the data, especially as positive data tends to undermine any defensive US currency demand.
US currency sentiment remained depressed with the underlying lack of yield support an important negative factor and markets looking to target 1.2000.
A decisive Euro break above the 1.1900 level triggered a fresh round of dollar selling and commodity currencies also made significant headway. In this environment, the Euro posted 27-month highs above 1.1950 while the dollar index slumped to 27-month lows.
Markets remained on alert for any potential protests against currency moves by the ECB and there was also speculation that the central bank could increase bond buying given the disinflationary impact of Euro gains. There were also concerns over the risk of a sharp correction if short dollar positions become over-extended, especially with a lack of liquidity during the August period. Germany reported a further increase in coronavirus cases and Chancellor Merkel warned against further easing measures. The dollar secured only a marginal recovery on Wednesday with the Euro around 1.1940 as the US currency remained on the defensive.
The dollar was unable to regain ground ahead of Tuesday’s New York open, although it was held in relatively narrow ranges above the 105.50 level.
The yen was undermined at the Wall Street open by a fresh record high for the S&P 500 index. There was, however, a slightly more defensive tone towards the European close as equities were hit by profit taking. The dollar overall remained on the defensive with lows just below 105.30.
There was an easing of tensions over the US postal service as planned changes will be suspended until after the November 3rd election, but no dollar support.
President Trump stated that he has no intention of engaging in trade talks with China at this time, maintaining fears over an increase in tensions.
Japan’s trade data reported a 19.2% decline in exports in the year to July after a 26.2% decline previously and slightly above consensus forecasts, although underlying confidence in the outlook remained weak. Core machinery orders declined 7.6% for July compared with consensus forecasts for a monthly increase.
Asian equity markets were mixed with the dollar rallying to 105.60 from lows just above 105.10 with wariness over potential verbal intervention from Japanese officials.
Sterling continued to defy generally negative sentiment on Tuesday and posted notable gains. The currency was notably resilient despite a lack of confidence in the economic outlook and Brexit trade uncertainty. The yield at the 3-year gilt auction increased to 0.78% from 0.68% previously.
Sterling strengthened to 7-month highs near 1.3250 against the dollar as a break above the 1.3200 level triggered a fresh surge in buying. The UK currency was also able to post gains against the Euro with the single currency weakening to 0.9010 despite wider strength.
Markets remained on alert for any comments on the trade talks and reports overnight indicated that there were disagreements over UK trucker’s access to the EU.
There was also a cautious report from the Chambers of Commerce with a lack of recovery momentum and cash flow problems. The UK CPI inflation rate increased to 1.0% from 0.6% and above market expectations of 0.6% with the core rate increasing to 1.8% from 1.4%. There are expectations of a notable decline next month as targeted VAT cuts lower prices. The data could, however, trigger a limited Bank of England reassessment and Sterling made net gains with a move above 1.3250.
The Euro was able to make net gains on Tuesday, although it fell short of 1.0800 against the Swiss franc. The dollar attempted to resist further losses, but was undermined by persistent negative sentiment and declined to fresh 5-year lows around 0.9010 before finding some relief.
The Swiss currency edged lower on Wednesday as precious metals failed to hold their best levels, although markets remained wary over the global recovery prospects which continued to limit potential franc selling. The Euro traded around 1.0780 with the dollar near 0.9025 as US currency sentiment remained weak.