EURUSD has been held on Monday in a narrow range of 1.1800-1.185 which formed in the last week. Unwinding of long positions in equities backed by algo-driven shorts wasn’t accompanied with USD advance as it happened in the past which indicates, in my view, almost complete lack of fundamental indications for greenback growth.
Looking from a different angle at this we can note that stocks retreated without typical response in the fixed income market – rise in junk bond yields. This clearly shows that the Fed suppressed strong demand factor for USD (“safe haven feature”) with aggressive easing and renowned inflation commitments:
When the S&P 500 falls, the yields of junk bonds often rise (i.e. bonds get cheaper), however, last week retracement, as we can see, was different.
US jobs market added roughly the same new jobs as was expected by the consensus (~ 1.4 million). Wages rose sharply m/m (+ 0.4% MoM) which fuels rumors about acceleration of consumer price growth and faster suppression of real yields which is negative for USD.
So, it looks like that EURUSD should resume rally, however, on the EUR side, expectations are stewing in the background that the ECB will talk about policy tweaks towards easing and, in a sense, counterbalance the dovish Fed. Recall that the last week’s data showed that inflation in the EU slowed down sharply in August. Moreover, expensive euro is not in the interest of the economy, as hinted by ECB chief economist Lane last week. Currency concerns are on the rise for a good reason. For example, trade-weighted Euro exchange rate rose to the highest level for 6 years since the start of 2020:
The EU is export-oriented economy so expensive Euro stifles export growth, slowing key driver of economic activity.
If Lagarde does not live up to expectations on Thursday and does nothing or not enough to curb the Euro rise, it is highly likely that it will strengthen further, including EURUSD. In other words, it is likely that current stability of EURUSD may hinge on the Central Bank’s policy outcome on Thursday. However, the baseline scenario is verbal intervention which investors will quickly shrug off. In my opinion, EURUSD longs, despite somewhat slowing bullish trend since the start of August and taking into account the latest eco data, still remain attractive.
Possible levels for the entry – lower bound of the current one-month trend channel or below the trendline of the larger upward trend, near the 1.1760 mark:
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