Time for the EURUSD to extend lower?
EUROPEAN UNION: Over the weekend, comments from US Treasury Secretary Jack Lew advising the EU to do more to “boost demand” and “resolve differences internally” made financial news headlines and seem to have followed a similar tone to ECB President Mario Draghi’s calls for further “structural reforms” to boost economic recovery. Such hypothetical changes are likely to take time and require lengthy discussions between appropriate EU leaders. In the meantime, the upcoming week is heavy with EU economic data and I continue to hold a bearish bias towards the EURUSD.
On Tuesday, the finalised French GDP figure for Q2 is released, expected to have stagnated in Q2 and unless there is an unexpected economic contraction, I am not expecting much market noise here.
Following that, the latest German Markit Manufacturing PMI and Markit Manufacturing PMI for the Eurozone are released. Both should be deemed high risk, but I will be keeping a closer eye on the latter. Now that the EURUSD has depreciated from those dizzy highs around the 1.40 area, investors are going to decipher whether the weaker EURUSD exchange rate is helping EU competiveness. If there are no signs of this occurring, calls will probably elevate for even further stimulus from the ECB.
On Wednesday, attention will be directed towards the German IFO data. There is pressure on the IFO, because last week’s disappointing ZEW survey dashed hopes following improved German Factory Orders and Trade Balance that economic data was returning to consistency. If the IFO data suggests that the German economy is continuing to go through an unexpected rough patch, we should assume this will have bearish implications on the Euro.
The week concludes with one or two ECB speeches which has the potential to cause fluctuations to the EU currency, but we also expect French and Italian Business Confidence and Italian retail sales to be released, useful to gain an understanding as to what momentum these economies are bringing to Q3, which can also obviously have inflation implications.
I continue to withhold a mid/long term bearish bias on the EURUSD. Over the last week or so, the pair found resistance between 1.2958 and 1.2994 on half a dozen occasions and this suggests to me any bull runs towards 1.30 are both capped, and limited at present. Back in August, Draghi’s comments that the “fundamentals for a weaker Euro exchange rate are better now than a few months ago” has stuck with me and as long as EU economic releases continue to further weaken sentiment, I see the potential for the EURUSD to conclude the month at the low 1.27s.
Now that the Scottish referendum is out of the way, the other obvious pair to keep an eye out for is the EURGBP. As long as escalations of political unrest within Scotland come to a conclusion, investor attraction to the GBP should return fairly soon.
The Bank of England (BoE) has finally disclosed a likely timeframe for a rate rise (spring 2015) which is something it refused to do in August and was a major contributor towards the GBPUSD downfall. The divergence of monetary policy between the BoE and ECB remains clear and as long as the BoE moves towards tightening policy and weak EU data continues to raise fears over the ECB loosening policy, the EURGBP is on track to move towards the July 2012 low, 0.7755.
UNITED STATES: The upcoming week is also busy with economic announcements from the US, where investors will be looking for further clues towards what economic momentum the economy is bringing to Q3. The manufacturing sector expanding at its fastest rate since March 2011 has certainly raised optimism, while the recent retail sales should be considered as robust. Pressure will now be on this Thursday’s Durable Goods to raise hopes for an impressive GDP Q3 figure around October. However, before Thursday, there are two scheduled Federal Reserve speeches where policy members will most likely continue to be asked for queues in regards to when the Fed will raise rates.
Although Janet Yellen and the Federal Reserve are currently all about the labour markets when it comes to discussing potential rate hikes, I feel there will be a time in the future when the Fed shifts stance somewhat and begins to indicate it is also looking at how much slack there is within the US economy, before raising rates. This is a term the BoE has frequently used, and it would not surprise if the Fed adopt this term as well fairly soon.
Last week, the Federal Reserve finally confirmed that Quantitative Easing (QE) will be concluding in October and although no hints are being dropped as to when a US rate rise will occur, it is moving closer to normalising monetary policy.
As long as upcoming economic releases from the US show the world’s largest economy is displaying consistency, I will remain bullish on the greenback until QE concludes. It also appears that gold is on track to continue its gradual decline in the meantime, and appears set to meet the 2013 lows ($1187) by the time QE ends.