EUR Resilience Amidst Chinese Concerns

After a week that has brought to the table some serious concerns about China’s near and medium-term outlook, it is quite a success for EUR/USD to be trading around 1.0900. The pair is not just exposed to Chinese sentiment via the risk-environment channel, but more directly given the eurozone’s economic exposure to China. The question now remains: will the Chinese story catch up with the euro? For now, it really appears that markets are welcoming Beijing’s forceful reaction, although much will probably depend on the developments in the distressed shadow bank Zhongzhi and the actual depth of the real estate slump.
All in all, it does look like there is a path for the euro and other pro-cyclical currencies to weather this Chinese turmoil without taking much damage, but that also means a delay in any substantial rally against the dollar.
Data-wise, we’ll take a look at the final inflation figures in the eurozone today. Markets are currently pricing in a 50% implied probability of a European Central Bank (ECB) rate hike in September, and have marginally scaled back expectations along the curve in the past few days. A full rate hike is not priced before the end of the year, which probably leaves some upside room for short-term rates in the eurozone should ECB officials come back after the summer holidays with some hawkish comments.
EUR/USD may keep trading in narrow ranges for now, with a modestly bearish bias to the 1.0850 level.