FX daily: Some respite for USD amid risk-on pause – ING Think

USD: Geopolitical tensions halting the bulls

Sino-American relations are back on a turbulent path, with Chinese authorities taking steps to retaliate against the decision to close the Chinese consulate in Houston. An order to close one of the US consulates in China appears imminent, while President Trump said he won’t exclude shutting down more Chinese diplomatic missions.

This situation has been a catalyst for a pause in the risk-on rally, but to start seeing a reversal we would likely need to see further escalation and above all evidence that trade relations will be impacted. For now, markets have once again shown complacency to geopolitical tensions, this time also thanks to the risk-positive combination of EU stimulus, encouraging vaccine trials and the prospect of a new fiscal boost in the US.

With the push from the first two factors wearing off, developments on bipartisan negotiations appear the key to unlocking more upside for risk assets despite geopolitical tensions. For now, there is little hope that an agreement will be reached by the end of this month. All in all, risk assets may start to show signs of fragility after the big bull-run. The US calendar may add to such concerns as initial jobless claims – which are expected to have flattened at 1.3 million – could see a higher reading as the impact of new virus containment measures in some US states has hit hospitality and high-frequency jobs.

From an FX perspective, we see signs of fragility offering a floor