FX Daily: Looking For Some Volatility

Earnings guidance from US banks, Chinese GDP data and several central bank meetings could put pressure on risk assets this week.

USD: Mild pressure to linger

Weekend developments have not destabilised the markets’ upbeat mood of last week. Risk assets have remained supported in early trading today, once again pushed by equities’ outperformance in China and most of Asia. The news that OPEC+ is considering tapering cuts in August is putting mild pressure on oil this morning (albeit WTI resisting above 40$/bbl). Markets should gain some clarity on this as the Joint Ministerial Monitoring Committee meets on Wednesday. As noted by our commodities team, unwinding cuts from 1 August is in line with the current deal and an extension of the cuts would likely come as a bigger surprise for markets. Elsewhere, Florida’s record jump in daily coronavirus cases is being partly mitigated by some signs of a slowdown in contagion in other hotspots across the US. Still, equities have proven resilient to the second wave story, and bad news on the virus does not appear to be taking centre stage. Instead, markets will be closely monitoring (a) US banks’ guidance as the earning season kicks in, (b) Chinese GDP data (out tomorrow morning), (c) a slew of central bank meetings. We discuss all this in “G10 FX Week Ahead: Gimme guidance” and we see the balance of risks for risk assets slightly tilted to the upside in the coming days, with the USD gentle downtrend consolidating. (UDN)

 

EUR: Wait-and-see ahead of ECB and EU summit

A wait-and-see approach may prevail in EUR crosses as the currency potentially faces a volatile week, with two key events taking centre stage. The European Central Bank meeting on Thursday will mostly be – according to our economics team (“ECB preview: The breather meeting”) a test for Christine Lagarde’s communication skills as no adjustments to the Banks’s monetary tools appear likely. In turn, the meeting may play second fiddle (from a market perspective) to intensifying negotiations on the EU Recovery Fund, which will culminate with Friday’s EU summit. We retain a mildly optimistic view here, as some steps towards a landing zone for negotiations appear to have been made: the “frugal” members could agree on grants instead of loans in exchange for some reforms (most likely, tax and pensions) in Southern economies. Still, some “noise” is expected, and EUR/USD may be shaken off of its recent low volatility torpor. (FXE)

GBP: Upside limited

Sterling has fully priced in the fiscal boost and is now looking at more limited upside potential, as UK-EU trade uncertainty lingers. Markets will look for further comments on quantitative easing in today’s speech by Bank of England GOvernor Andrew Bailey, after he indicated he'd prefer to shrink the balance sheet before raising rates in the recovery phase. (FXB)

JPY: Stuck in recent range

We expect USD/JPY to continue trading within the 106/108 range in the coming days with Wednesday’s Bank of Japan meeting unlikely to yield any policy change. Still, some equity volatility may offer a chance to test the downside of the range. (FXY)