Will Euro “Twist” in the Wind?

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Market Drivers July 26, 2018
Slight risk relief rally in Asia post EU/US truce
All eyes on ECB
Nikkei -0.12% Dax 1.42%
Oil $69/bbl
Gold $1226/oz.
Bitcoin $8250

Europe and Asia:
No Data

North America:
EUR ECB Presser 8:30
USD Durable Goods 8:30

FX saw risk-on rally in early Asian session trade as EU and US reached a temporary truce on their trade disputes after yesterday visit to the White House from EC President Juncker.

As many analysts have pointed out that the two parties have simply “agreed to agree” without making any major breakthrough in the talks, but most importantly Mr. Trump abandoned the idea of 25% tariffs on all imported cars which would have sent global financial markets into a tailspin.

For now the cold peace between EU and US was good enough to stabilize the FX markets although USDJPY continued to drift lower dropping below the 110.70 level in morning London dealing. Part of the decline may be due to the general correction in the dollar index rally, but the weakness in the pair clearly signals angst by the market over the long-term implications of the simmering trade war.

Meanwhile, with trade issues temporarily on the back burner, focus will shift to monetary policy as ECB holds its monthly presser today at 12:30 GMT. Last month’s dovish tilt by ECB caused a near 300 point decline in the pair and the euro has basically spent the last four week digesting those losses.

It’s highly unlikely that Mr. Draghi will deviate much from his prior remarks. Although EU monetary officials always make a pretense of saying they do not care about the exchange rate levels, they are keenly aware of the importance of lower euro for the export-driven region especially in the midst of a budding trade war. Therefore Mr. Draghi is unlikely to offer the market any hawkish commentary though he may reaffirm that growth in the region remains steady despite the trade war jitters.

Of much greater interest to the market will be any possible hint that the ECB could engage in “operation twist” – a policy first use by the Fed which swamped short-dated securities in favor of long-term bonds thus depressing long-term rates. If Mr. Draghi suggests that the central bank will consider such a move before engaging in a full taper the news would be very bearish for the EURUSD and the pair could tumble and test the key 1.1500 level of support. However, such an overt move to jawbone the currency lower would no doubt infuriate Mr. Trump and it’s doubtful that the ever so careful Mr. Draghi would be so aggressive with his words today. Still, that is the key downside risk to the pair as the day proceeds.

Boris Schlossberg
Managing Director

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