Time for the EURUSD to ex­tend lower?

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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