Is Euro Headed for 1.15?

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Is Euro Headed for 1.15?

Daily FX Market Roundup 08.17.18

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

The second full week in August was a good one for the U.S. dollar. The greenback extended its gains against most of the major currencies but the rally is slowing as investors cover their shorts in EUR/USD, AUD/USD and other major currencies. Softer than expected U.S. consumer confidence helped to fuel their recoveries but the prospect of 2 relatively quiet data weeks and the potential for a disruptive trade meeting between the U.S. and China also encouraged investors to reduce their short positions. The most important event risk next week will be the U.S. and China’s trade talks on August 21 and 22. If the talks go well, risk appetite will improve allowing deeply oversold currencies like the Australian dollar to recover. However if the U.S. and China continue to bump heads, we could see renewed losses for euro, sterling and aussie along with gains for the U.S. dollar. U.S. fundamentals are still sound and next week’s FOMC minutes will remind us that the Fed is on course to raise rates in September. So at most we expect the pullback in USD/JPY to take the pair to 109.90 or 110.

After hitting a low of 1.13 on Wednesday, EUR/USD ended the week near 1.14. Like the U.S., slightly weaker Eurozone trade and current account data had very little impact on the currency. Eurozone PMIs are due for release in the week ahead and of all the economic reports on the calendar, these are the most important because previously, we’ve seen very little sign of trade tensions impacting the Eurozone economy but if the August numbers show a slowdown, euro will resume its slide. If the data shows that manufacturing and service sector activity continued to expand at a faster pace, EUR/USD could extend its gains to 1.15.

Of all the major currencies, sterling experienced the weakest recovery. With short positions at their highest level since May 2017, GBP/USD was at the greatest risk of a short covering rally. However that did not happen despite the pullback in the U.S. dollar and better than expected U.K. data last week. Consumer spending rose 3 times more than expected in July, year over year CPI growth accelerated to 2.5%, well above the central bank’s 2% target and the unemployment rate dropped to its lowest level in 43 years. There was a slowdown in wage growth and zero price growth on a month to month basis, but the improvements should have overshadowed the deterioration. Yet it did not, which shows how strong the selling pressure really is. The problem is that the risk of a no-deal Brexit is growing but taking a look at the GBP/USD daily chart – higher highs and higher lows suggest that a stronger recovery is brewing. If it happens, it would be driven by Brexit headlines or a deeper pullback in the U.S. dollar because there are no major UK economic reports for the rest of the month.

All three of the commodity currencies traded higher today with the Canadian leading the gains. CAD benefitted from stronger than expected consumer price growth and talk of possible breakthrough in NAFTA negotiations. Canadian data has been good and the 0.5% uptick in CPI last month took the annualized pace of growth to 3%, the highest level since September 2008. The market is now pricing in 76% chance of a hike in October and 82% chance of tightening by the end of the year. Canadian retail sales are scheduled for release on Wednesday. While last month’s 2% increase (which was the strongest in 2 years) will be hard to beat, the consistent improvement in the labor market favors a continued rise in spending. NAFTA headlines will be just as important as data to the path of USD/CAD in the week ahead. We believe it should only be a matter of time before the pair takes another trip below 1.30. Hotter than expected producer prices lifted NZD/USD while AUD/USD benefitted from positive comments from RBA Governor Lowe who reminded us that the Australian economy is moving in the right direction and the next move for the central bank is more likely to be a hike and not cut.

Kathy Lien
Managing Director

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