FX Daily: The euro offers decent resilience to USD momentum

A slump in risk assets yesterday confirmed the fresh high market sensitivity to new Covid-19 cases after:

a) the second virus wave no longer appears to be a US-only story as new cases were reported in Germany, Japan, China and Australia.
b) there is a growing concern that new restrictive measures will be deployed. In turn, while we maintain a positive medium-term view on risk assets, it will mostly be about infection numbers that drives sentiment in the short-term.

Developments in Texas remain key, but as daily Covid-19 figures are reported throughout Europe during the day, investors will look for any additional signs that the second wave of Covid-19 is becoming a global story. Markets are also expecting some follow-up to yesterday’s threats of new US tariffs to the EU, UK and China. Data-wise, durable goods orders in the US will join other indicators in a sharp rebound in May and initial jobless claims – which are losing centrality - should continue to edge lower but staying above 1.3 million.

With data likely to play second fiddle to the virus headlines, investors are likely to remain rather jittery today, with the balance of risks for pro-cyclical assets tilted to the downside and the dollar may remain supported on safe-haven bids.

EUR/USD keeps edging lower on faltering risk appetite, but the common currency is offering some decent resilience, especially given the rising idiosyncratic risk of new US-EU trade tensions.

Meanwhile, the European central bank is back in focus after a media report suggested the Bank has agreed to provide documents to account for its asset purchase programs to the German constitutional court. The ECB is set to remain on investors’ radars today as the minutes for the June meeting are due, and markets will likely look into the decision-making process around the PEPP top-up to identify any potential disagreement within the Council.

Some ECB speakers will follow in the afternoon. We don't expect ECB-related news to hinder EUR’s resilience today and EUR/USD downside may be contained within the 1.12 support for now.

Negatives seem to be piling up for GBP as the UK may a) face a second virus outbreak right as it attempts to re-establish normality, b) get caught in the US protectionist fire.

Today, keep an eye on Bank of England's Chief Economist Andy Haldane's speech, although it is unclear whether he will talk about monetary policy.

The largest daily increase in cases in Australia is a concern for the ability of AUD to retain its recent strength, which was partly built on the notion of a nearly “virus-free” country. New pressure on the 0.6800 support may come this week.