EUR/USD Catching EU Summit Lift, As Gold Floats On Dovish Fed

July 15, 2020

London (July 15)  The bounce in EUR/USD well above 1.14 seems to be driven by increasing optimism on the EU summit this weekend; and the general US dollar weakness, with USD/JPY also below 107 and USD/CNH below 7.0.


As for the summit, there remains a pervasive level of skepticism on the street, suggesting there is still a potential for an upside surprise, so 1.15+ is not out of the questions.


From a technical perspective, EUR/USD has been making higher lows and higher highs in the past couple of days going into this week's ECB meeting and EU summit, further encouraging the long EUR/USD buy-in.


Fear has failed to materialize

So far, fear has failed to materialize, and all the hoopla about market tops and key reversals proved to be wide of the mark.


US equity markets bounced back helped by a combination of dovish Fed speak and the news that Moderna (NASDAQ:MRNA)'s COVID-19 vaccine produced antibodies to the virus. However, there are a couple of notables that stand out.

1) Market leadership shift?


Nasdaq was up .94% while the SPX 1.34, while a thin margin of difference, are investors feeling confident to spread their horizon and could see a change on equity market leadership board.


2) China market jitters


Chinese equity markets ended the day in the red despite the broader rally. For example, the Nikkei was up 1.59%, whereas the CSI 300 was down 1.29%. President Trump's order to end Hong Kong's special status with the US didn't help sentiment which is suggesting locals now fear a further round of escalations, which was reinforced by US House Speaker Nancy Pelosi urged President Trump to consider `every tool' for China's action, Bloomberg reports.


Gold floats higher

Yesterday's Fed speakers were all on the dovish side. Richmond Fed President Barkin was worried that unemployment could rise again as firms realize that the recession will last longer. His concern is that once the Paycheck Protection Programme expires, businesses will start laying off workers. Dallas Fed President Kaplan also warned of overcapacity in the economy and that the overwhelming trend would be deflationary. States and municipals would need further assistance while it would be time before the economy and markets converge again. That is an essential comment as it tells you the Fed is not concerned about asset prices for the time being.  All of which is helping to float gold


It was Governor Brainard's comments that were most interesting, though. She said there was a "thick fog of uncertainty" and "downside risks predominate." Financial support was vital, and she warned that it could be appropriate to shift the focus of monetary policy from stabilization to accommodation.


The bigger picture for gold is that on top of the WWII-sized stimulus already injected into the economy, there is more to come.

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