Strengthening of the Japanese yen and the Chinese yuan forced the EUR / USD bears to take profit

The counter-attack of Asian currencies against the US dollar forced the EUR/USD bears to postpone their plans to re-storm the support at 1,1535. According to the summary of the Bank of Japan meeting on July 30-31, at least one member of the Policy Board wishes to see an extension of the 10-year bond yield range to +/- 0.25%. Reuters, citing competent sources, said that the regulator is considering withdrawing from the policy of negative interest rates. The People's Bank of China called on the banking institutions of the country not to be like sheep and not to buy up USD/CNY massively .

The PBOC has taken account of its mistakes and does not intend to spend huge funds to stabilize the yuan by selling gold and foreign exchange reserves, as it was in 2015-2016. Proof of this is the growth of the index from $ 3.11 trillion to $ 3.12 trillion in July. The central bank is more cunning. It puts pressure on the forward rate USD/CNY using swaps. Buying dollars for yuan today with the obligation to sell them after a certain time, the regulator understates the cost of the greenback in the future. As a result, the market is not at all sure that the pair will pierce the psychologically important mark 7 within the next three months. So in the survey of 20 Bloomberg traders and analysts, only one respondent sees such an outcome. Consensus evaluation suggests that USD/CNY will drop to 6,775 by the end of this year.

The growing confidence of investors in stabilizing yuan allowed this currency, unlike Shanghai Composite, to ignore the factor of Washington's expansion of tariffs for Chinese imports of goods from $ 34 billion to $ 50 billion since August 23. Morgan Stanley estimates that this will add 0.03 ppt to the growth of American inflation in 2018. What is more important is the potential decision of the US Supreme Court to levy a sales tax on online stores. It is about +0.07 pp and an additional $ 8-13 billion in the budget. The acceleration of inflation will help accelerate the normalization of the monetary policy of the Fed, which should be seen as a bullish factor for the Greenback.

Dynamics of American inflation


Source: Wall Street Jоurnal.

We cannot say that the euro has no answer. According to recent ECB studies, in the countries of the currency block over the past two years, there have been increases in salaries and productivity. This circumstance allows to count on acceleration of inflation and GDP of the eurozone in the near future.

Dynamics and structure of European inflation


Source: Bloomberg.

For EUR/USD, August appears as a relatively quiet month, but in the autumn the nerves of investors can be undone by political risks. This is the first draft budget for the Italian Eurosceptics and the midterm elections in the United States. The loss of Republican control over the House of Representatives, according to Standard Chartered, will lower the yield of treasury bonds and the dollar rate.

Short-term market will closely monitor the negotiations between Tokyo and Washington on August 9 and after the release of inflation data in the US on August 10. Rebounds from resistances at 1,163 and 1,166 are still relevant. Only a breakthrough of 1,175-1,176 will open a way north for the EUR/USD bulls. 


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Price chart of EURUSD in real time mode

Dollar got a letter from Asia

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