EUR/USD Gives Up 1.3500 as Sentiment Sours

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Market Drivers for July 22 2014

Euro drops through 1.3500 again

Nikkei 0.84% Europe 0.53%

Oil $105/bbl

Gold $1310/oz.

Europe and Asia:

GBP UK PSNB 9.5B vs. 10.3B

North America:

USD CPI 8:30

USD Existing Home Sales 10:00

The dollar rose across the board with EUR/USD tumbling below the key 1.3500 level in morning European dealing today as the conflict in Ukraine is clearly starting to weigh on the pair. There was no specific news to move the pair, but as we noted yesterday the accumulation of geopolitical stress and the elevated level of tension between Russia and EU has cast a pall over investor sentiment in the region as trader fear that political conflict will result in a slowdown of economic activity.

EUR/USD slipped to a low of 1.3480 before rebounding slightly as currency markets are becoming increasingly more wary of the economic conditions in the region. With demand in the EZ still very tepid any further geopolitical shocks could tip the periphery economies back into a recession which would likely weigh more on the unit.

This week the market will get a glimpse at two key pieces of data – the EZ flash PMIs and the IFO report and if both of those release disappoint, the EUR/USD could drift towards the 1.3400 level as further liquidation kicks in.

Meanwhile in UK the Public Sector Net Borrowing figures showed a bigger deficit than expected at 9.4B vs. 9.5B eyed. More importantly the prior month’s results were all revised to show higher than expected deficits suggesting that despite the strong growth in UK economy fiscal spending remains a serious problem. UK public sector net debt ex financials now stands at 77% of GDP – the highest on record.

The news may give the BoE pause with respect to consideration of any monetary tightening as any hike in rates will increase the UK government’s cost of borrowing and only contribute to the deficit. The focus for the pound this week will be the BoE minutes with traders eager to see if any MPC members has moved to a hawkish stance.

Cable for now remains capped at the 1.7100 mark with the pair consolidating in tight 1.7060-1.7080 range for the past two days. If consensus view shifts to the idea that BoE will not hike before 2015, the pound could be in for further profit taking as the day proceeds.

In North America today the market will get a look at the CPI and Existing Home Sales data. Expectations are for slight drop in core readings, but if the numbers prove to be hotter, the dollar could see a further boost as pressure on the Fed to hike rates will increase. With US economic activity continuing to expand and price pressures rising the FOMC will find it hard to maintain its dovish bias. On the other hand if the data is tame the buck may give up some its gains overnight especially if US bond yields begin to drift towards the 2.40% level.

Boris Schlossberg
Managing Director

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