EURUSD Down to 1.10, Here is What You Need to Know

In quiet markets ahead of G3 central bank meetings later this week, currency pairs are being driven by the soft set of eurozone July PMIs and the prospect of some renewed Chinese stimulus after China's Politburo promised 'counter-cyclical' measures. These look like short-term trends. I would wait for the policy meetings to set the true FX tone.

USD: China stimulus – here we go again.

Amid the calmness prevailing in the markets ahead of the G3 central bank meetings, the FX market's attention has once again shifted towards China. Having failed to meet investor expectations this year, China's economy is anticipated to receive a boost following the announcement of 'counter-cyclical' measures by China's Politburo yesterday. These measures come after a series of support actions taken over the past few weeks, including easing restrictions in the mortgage sector, promoting car and electronics purchases, and potentially aiding local governments burdened with debt. While none of these initiatives have been groundbreaking so far, optimistic market participants hope that the Politburo's new directive will translate into significant stimulus at the State Council level.

Interestingly, the announcement of these measures during the European session yesterday had little impact on USD/CNH, but Asian investors have latched onto the news, leading to a 0.6% increase in the renminbi's value during this European morning. Chinese equities are also showing promising performance. However, history has shown that such short-term trends may fizzle out, as seen with previous prospects of China stimulus, yet they could offer mild support to emerging market and commodity currencies throughout the session.

Despite these positive signals from China, caution is advised against fully embracing a 'risk-on' rally in Rest of World (RoW) currencies due to the weakness observed in the European economy. Furthermore, the upcoming FOMC meeting is likely to see the Federal Reserve maintaining its monetary tightening stance, as indicated in a recent Wall Street Journal article titled 'Why the Fed isn't Ready to Declare Victory on Inflation' by Fed watcher Nick Timiraos. This points towards the FOMC statement remaining hawkish in tone.

Looking at the US data releases for today, they may not be of top-tier importance, but there is a consensus anticipating a decent uptick in the July consumer confidence reading. Both in the US and the UK, there is a growing sense that consumers have been coping with higher interest rates relatively well, which could diminish the case for any early easing cycles.

Considering these factors, it is expected that DXY will trade within a tight range of 101.00 to 101.50 leading up to tomorrow's Fed meeting.

EUR: July PMIs rain on the parade

Yesterday, Bert Colijn (ING Economist) pointed out the concerning eurozone July PMI figures, indicating a potential contraction rather than stagnation in the European economy. This aligns with my European macro view expressed in their ECB commentary, which highlights the ECB's overly optimistic growth forecasts. A reality check on these forecasts could weaken the stance of ECB hawks. In fact, the PMI data prompted an independent 0.4% sell-off in the trade-weighted euro.

While the break below 1.1100 in EUR/USD yesterday was driven by the euro's performance rather than the dollar's, I anticipate some downside risks for EUR/USD from the dollar's side later this week. The support at 1.1050 is likely to be under pressure leading up to tomorrow's FOMC meeting, and a breach below 1.10 would reverse the positive momentum observed earlier this month. Today, I expect EUR/USD to trade in a very narrow range, possibly between 1.1050 and 1.1100, where the pro-growth China news may be the only factor preventing EUR/USD from dropping below 1.1050.

Taking a broader view, a more sustainable upside breakout in EUR/USD might have to wait until September when the Fed will likely have enough evidence of disinflation to officially acknowledge it in an FOMC statement.

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