The US dollar appreciated against its main rivals on Tuesday as investors expected new catalysts for trade talks after the European Union’s parliamentary elections that polarized the 28-nation bloc.
The yen is in a state of detention, while US President Donald Trump, who is visiting Japan, is putting pressure on Tokyo to reduce the country’s large trade surplus with the United States.
During the Asian trading session, many currency pairs have stayed around their recent levels as the activity was running out because stock exchanges in the United States and the UK have been closed on Monday due to holidays.
The US Dollar Index, which measures the strength of the greenback against a basket of six major currencies, rose by 0.2% to 97.804 points, trading 0.6% above the 2-year high of 98.371 points on Thursday. The index is still up by 1.7% in 2019.
The Euro has been put under pressure, following the remarks by two senior currency bloc officials, that the European Commission is likely to start disciplinary action against Italy on June 5 due to the country’s growing debt and structural deficit levels that violate European Union rules.
The currency pair EUR/USD has ticked lower in the Tuesday session. The Euro fell by 0.1% to 1.1182 USD after rebounding to a 1.5-week high of 1.1215 USD when the preliminary results of the European parliamentary elections were announced on Monday evening.
Pro-European parties have retained control over the European Parliament, as the provisional results of the bloc’s election showed on Monday that despite Eurosceptic opponents, current leaders remain the lead. There is a polarization of the European Parliament that is a particular representation of the common European political situation, which might have a negative effect on the Euro as a whole.
The news of possible disciplinary measures against Italy in connection with the national debt would harm the Euro, but the market reaction is limited due to the holidays in the United States and the UK.
After finding daily support in the 10-day SMA near 1.1170 during early trade, spot managed to regain some upside bias and is now navigating at shouting distance from the key 1.1200 mark.
In addition, the spot is gaining extra upside following declining US-GE spread yields, where yields of the US 10-year reference are trading in fresh lows in the sub-2.38% zone, levels last seen in September 2017.
A breakout of 1.1215 (high May 27) would target 1.1233 (55-day SMA) en route to 1.1264 (monthly high May 1). On the other hand, the next support emerges at 1.1142 (low May 21) seconded by 1.1107 (2019 low May 23) and finally 1.0905 (high March 27, 2017).
Chinese currency is likely to depreciate to over 7 CNY per dollar (6.90 now) because of the economic conditions, and regulators encourage it. Even in China, the economic foundation cannot be ignored indefinitely.
The disputes between some market participants about the willingness and ability of the People’s Bank of China to hold the yuan below this level lack a long-term perspective – China’s economic growth slows down and the exchange rate will inevitably reflect this.
With the economic slowdown, the regulators loosened fiscal and monetary policies. Under these circumstances, it is natural for the currency to weaken (as it did last year) with a decline of nearly 8% against the US dollar. This reflects trends that have been in force long before Donald Trump came to power.
The time of the double-digit growth rate in China has ended. The country’s workforce is declining and authorities are trying to curb excessive lending and its accompanying debt. White House duties and sanctions against technology firms exert additional pressure on China and erode economic confidence.
After China suspended its fixed exchange rate to the US dollar in 2005, the yuan floats freely, even with the blessing of the central bank. Its course generally suffers the same economic and financial pressures as other major currencies. Surely Beijing will synchronize monetary policy with the prevention of capital outflows and financial turmoil.