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The US dollar remains in demand because of a reduced appetite for risky assets. However, the British pound is an exception. However, it may also fall, like other major global currencies, at any time. The yuan is also facing significant problems. Recently, the People's Bank of China put up strong resistance to weakening its national currency by conducting several interventions. Their goal is to restore market confidence, which has been shaken by disappointing data and credit risks.
The People's Bank of China set the official midpoint at 7.2006 per dollar, compared to the average estimate of 7.3047 by traders and analysts. This was the largest difference since surveys began in 2018. Last week, the authorities ramped up their support for the yuan, which was under pressure. Yet the sell-off continued both domestically and internationally. This week, the regulator mandated state banks to intensify their interventions.
Experts note that for many years, the central bank has been very sensitive to any sharp fluctuations in the yuan's exchange rate. Such fluctuations could lead to a shock devaluation like the one seen eight years ago. This situation puts China at risk of a vicious cycle of capital outflows, leading to an even more significant depreciation of the yuan.
As I mentioned earlier, to prevent such a crisis, the PBOC began strictly regulating the yuan using a mechanism that limits daily currency fluctuations to 2% in both directions. If the downward trend does not reverse, the central bank might employ more aggressive tools. These measures could involve higher dollar liquidity, raising the cost of short trades on the yuan in the forward market, or even creating a yuan deficit in Hong Kong.
Following these measures, the yuan increased by about 0.1%. As a result, its price against the US dollar rose to 7.26 but then started to weaken again. The base rate was also set higher than the previous day for the first time in six sessions.
In addition to calling for more interventions this week, Chinese authorities instructed state banks to check whether local corporations are speculating on the yuan, taking advantage of its high volatility. This inquiry came when the yuan dropped to 7.35 against the US dollar, a level closely monitored by top leadership.
Notably, the pressure on the yuan is coming from discouraging economic data on retail sales and housing prices. Combined with an unfolding crisis in the real estate sector, investors lack confidence and try to avoid the yuan. The PBOC's rate cuts to stimulate growth have added even more uncertainty.
Regarding today's technical picture for EUR/USD, the pressure on the euro remains the same. To regain control, buyers should keep the price above 1.0890. This would pave the way to 1.0920 and allow the pair to test 1.0950. From there, the price may climb to 1.0980. However, it would be quite difficult without support from major traders. If the pair drops, I expect significant actions from major buyers only around 1.0860. If they fail to be active, it would be wise to wait for a low of 1.0840 or consider long positions from 1.0810.
Thus, the pound sterling continues trading within the channel. The pound sterling will rise only after bulls gain control over the 1.2725 level. Regaining this range will boost hopes for recovery to 1.2760 and 1.2210, after which we can talk about a surge to around 1.2840. If the pair falls, bears will attempt to take control of 1.2690. If they succeed, a breakout of this range will hurt bulls' positions and push GBP/USD to a low of 1.2660, with the potential to drop further to 1.2620.
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