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Will The Rebound in China 'Liquidity' Matter For the Euro?

  • Sentiment on the Euro has been plunging in the past year, first due to the significant deceleration in the Chinese economic activity, fading growth expectations and then the breakout of the Ukraine war.
  • With recessions surging globally, particularly in Europe, preference for the 'safe' USD has been soaring, leaving the single currency vulnerable in 2022.
  • EURUSD has been constantly testing news lows and found support several times slightly above the key 1.0341 level in the past two months.
  • Hence, investors have questioned if the pair will reach parity in H2 as the global outlook keeps deteriorating.
  • However, the rebound in China 'liquidity' in 2022 combined with the recovery in soft data amid 'China reopening' could be supportive of the single currency in the near term.
  • The chart below shows that China 'liquidity' has strongly led EURUSD exchange rate in the past cycle and is pricing in a rebound in the Euro.

Source: Bloomberg/MNI

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