FX Daily: DXY is also driven by EUR
FX Daily: DXY is also driven by EUR
USD held firm even though US stocks clawed back their start of the day losses. In fact, the USD Index (DXY) appreciated to 93.86 on Thursday from 93.38, back around the levels it started October. The US 10Y treasury yield dipped briefly below 0.70% and rebounded to 0.7320%, above the 0.7270% close a day earlier. Stock investors have been less hopeful for a US stimulus deal before the US elections on 3 November. President Donald Trump’s willingness to up his offer of USD1.8tn is likely to be opposed by Senate Republicans. Democratic House Speaker Nancy has held her ground on the USD2.2tn passed. House Democrats have, however, started to worry that the bill would be delayed till February if President Trump loses the election and becomes disinterested. There is also the risk that the Republicans retain control of the Senate. Apart from risk appetite, pay more attention to the downside risks in EUR or the DXY’s largest component. The DXY needs to rise above 94 before it can proceed to the next resistance level around 94.66 or its 100-day moving average.
EUR is waking to widening downside risks. EURUSD fell to an intra-day low of 1.1689 on the first day of the EU Summit on Thursday. The weakness stemmed from the widening negative 10Y bond differential between the EU and the US. At minus 134 bps on Thursday, the spread was the deepest since the start of the pandemic in March. More importantly, the gap reflected the relative weakness of the EU. Against a Fed on hold, the European Central Bank has signalled its willingness to deliver more stimulus in November and December on a loss in momentum in the EU’s recovery. EU’s weakened fundamentals were evident in the 2.5% plunge in European stocks from the widening and stricter restrictions by more EU nations to contain the coronavirus. Against this background, the EU recovery will be vulnerable to any no-deal Brexit outcome. The next support level for EURUSD is around 1.16 or its 100-day moving average.
GBP returned below 1.30 to 1.29 on Thursday. EU leaders were united at the EU Summit in calling on the UK to “make the necessary moves” to continue Brexit talks with the aim of reaching an agreement by early November. British negotiators were dismayed that the EU had put the onus on the UK to cede ground on key issues (fisheries, subsidies and governance) to secure a deal. Three EU nations – France, Denmark and the Netherlands – have been unwilling to compromise on their demand for access to UK waters for their fishermen. British Prime Minister Boris Johnson is expected to respond today if the UK would proceed with talks or walk away. Put simply, both sides are now looking at a thin deal or no-deal. GBPUSD’s next support levels are around 1.2830 first, and 1.2710 next.
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