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Dollar Weakens Ahead of Earnings Season

13 July 2020

The dollar has weakened in early European trade Monday, with investors turning to risk-sensitive currencies amid optimism over the upcoming earnings season even as the Covid-19 outbreak rages on.

At 3:05 AM ET (0705 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 96.448, not far from the June trough of 95.714. EUR/USD gained 0.2% to 1.1324, GBP/USD was up 0.2% at 1.2650, while USD/JPY was up 0.1% at 107.95. 

The U.S. corporate earning season will start this week, and this is expected to offer more evidence of a recovery, admittedly from beaten down levels. The key question will be whether the valuations currently priced in are supported by the outlooks given by companies.

Goldman Sachs (NYSE:GS) has become a little more optimistic on earnings prospects for the S&P 500 Index this year, lifting its baseline forecast for S&P 500 earnings per share in 2020 to $115, up from a prior estimate of $110.

This is despite the resurgence of the Covid-19 virus. The World Health Organization reported a record 230,370 new cases in 24 hours on Sunday. Roughly a quarter of these new cases are in the U.S., with the state of Florida reporting more new cases in 24 hours than hard-hit New York did in April.

Also helping the euro push higher against the dollar Monday was the decision of Fitch rating agency late Friday to confirm Italy's credit rating, with a stable outlook. 

That said, these moves have been limited, and it’s difficult to see the catalyst for sharp moves in the dollar in the near term.

“The ongoing rise in Covid-19 cases in the U.S. is preventing the market from turning bullish on risk (thus preventing a USD sell-off), while the put from the Federal Reserve and other central banks to do more if the situation warrants it prevents a sharp risk-off environment,” said ING, in a note to clients. EUR/USD continues to trade around the 1.13 level which has transformed into a gravity line over the past month, ING added. “This is likely to hold for now, with limited near term catalysts that would point to a break in the EUR/USD range trend and the July ECB meeting … unlikely to be a trigger point.”

Elsewhere, the result of Poland's knife-edge presidential election was still uncertain, with an Ipsos survey showing incumbent Andrzej Duda, an ally of the ruling Law and Justice (PiS) party, winning 51.0% of the vote.

“If Duda wins another term, we expect little or no change in either economic policies or relations with the EU,” said analysts at Danske Bank, in a research note. “Over time, [Rafal] Trzaskowski may be able to seed a more conciliatory line towards the EU, although for EUR/PLN spot, the current Euroskeptic politics have not been persistent in driving moves,” added Danske.

At 3:05 AM ET, EUR/PLN traded 0.1% higher at 4.4624.



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