The EUR/USD Exchange Rate Remains 'Constructive' as Break of 1.13 Takes Place
The EUR/USD retains a bullish bias despite having suffered a soft patch at the start of the week beginning 22nd August.
The Euro remains in the driving seat against the US Dollar having broken through 1.13 at the time of writing.
The EUR/USD has enjoyed a strong rally since late July and has been determined to try and test the pre-Brexit highs of 1.1425 again.
The lion's share of the move has largely been as a result of a weaker US Dollar which has been undermined by a US Federal Reserve that appears reluctant to budge on raising interest rates.
“The Euro has rebounded from a brief soft patch, with the technical picture remaining constructive. Resistances continue to be found at 1.1365 and 1.1430, with key supports located in the 1.1225/1.1233 zone,” says Ralf Umlauf at Helaba Bank in Frankfurt.
On the European front, a wealth of sentiment indicators are on this week's calendar, led by tomorrow's preliminary purchasing managers indices in France, Germany and the Eurozone.
The previous month had revealed that political uncertainty due to the Brexit vote is not reflected as strongly as in sentiment surveys with expectation components.
“Economic growth at the beginning of the third quarter looks positive. In Germany, the PMIs are well in expansion territory. In particular, the services sector is is proving strong and signals robust domestic economic growth," says Umlauf.
August's data are unlikely to alter this picture. Helaba expect Thursday's release of the ifo business climate index to also come in correspondingly stable, with the ZEW survey providing a positive indication on balance.
The EUR/USD recovery of the previous week was partly due to a better than expected ZEW Sentiment data result, which showed German finance professionals overall more upbeat about the medium-term outlook for the economy, as Brexit concerns fade.
The ZEW is an important study which tends to lead the economy, so a positive result from the survey usually precedes growth, in Germany and the Eurozone.
A major driver for the Euro side of the pairing is the outlook for ECB policy, which is showing diminished expectations of further easing materialising in September.
This would be an all-out positive for the shared currency as further rate cuts and increased quantitative easing would undermine the currency to some degree and ensure strength against the Dollar remains capped.
According to Societe Generale’s Kit Juckes, the market-based probabilities of a September hike have fallen to 17.8% due to the strong ZEW data, whilst the odds this year, “have fallen from 52% to 42%.”
The Euro has its detractors, however, with TD Securities’ Head of Global Strategy, Richard Kelly, saying that, “after months of flying under the radar we think EUR weakness could come back as a significant market theme.”
Of the argument’s put forward by Kelly, the stretched divergence between European and US swap rate differentials (a kind of forward looking indication of interest rates), is one of the most compelling.
This appears to indicate that whilst Eurozone interest rates are expected to remain lower than US rates in the medium-term, the euro is rising versus the dollar.
The expectation would be for the opposite to happen, and the euro to weaken due to the lower interest rate outlook in its region, since international capital tends to flow to the higher yielding denominations.
TD therefore see the discrepancy as likely to be corrected by a depreciation in the euro side of the pair.
Technical Forecast for the Week Starting 22nd August
The pair has been recovering ever since the late June Brexit lows.
This move has now broken above a key channel line and a trend-line for the previous move down, solidifying its bullish credibility.
Now these breaks have happened and the peaks and troughs are moving higher the pair is likely to extend upwards.
A break clearly above the 1.1380 highs would provide the necessary confirmation leading to a continuation up to the next target at 1.1430.
Data for the Dollar
The Dollar, meanwhile, weakened after the FOMC minutes showed the Federal Reserve still reticent about raising interest rates.
We get the sense that only when a 2016 rate hike is cemented will the USD be able to put in some upside.
Fed-watchers will want to see an improvement in US data before daring to push the USD higher.
From a hard data point of view the week doesn’t really get going until the Tuesday when Manufacturing PMI for the month of August is released, as well as New Home Sales, which are forecast to fall by -1.8% in July.
Homes will remain under the magnifying glass on Wednesday when Existing Home Sales are expected to show a -0.4% drop mom in July.
On Thursday, Jackson Hole - that yearly central banker conflab – kicks off, with commentary from all major governors closely scrutinized, but especially for Janet Yellen in the case of the dollar, who is set to give a policy speech on the Friday.
The market is still a little bit bewildered by the lack of aggression show by her and her board in raising interest rates and at JH symposium she will have the opportunity to provide more flesh on the bones of current rather thin guidance.
Orders of Durable Goods, that is big things like plant, machinery, transportation vehicles and the such, will also be released on Thursday.
The headline figure is forecast to show a 3.5% rise mom in July, whilst the Core value, which strips out really big ticket one off sales of things like aircraft is expected to increase by 0.5%.
Into the end of the week and it doesn’t let up for the dollar, with a data dump on Friday, consisting of Q2 GDP (albeit second estimate), which is expected to come out at 1.1% from 1.2% preliminary estimate; the Goods Trade Balance, Services PMI in August and Michigan Sentiment in August.