Further Euro Exchange Rate Gains Loom
- Written by: Gary Howes
The euro exchange rate complex witnessed blinding gains on Monday the 25th of August. Where do we go from here?
"We suspect that any near term correction in EUR/USD proves shallow, e.g. 1.1450/1500" - ING strategy note.
After Black Monday on the global financial Markets, we saw a ‘Better Tuesday’.
Investor sentiment improved and Monday’s moves partially reversed with equity markets outside of China recovering, while the yen and Treasuries headed lower as safe haven support eased.
The euro exchange rate complex fell back following the sharp rise seen at the start of the week; however we have reported that many are starting to forecast a stronger EUR ahead on the back of the recent moves higher.
Commodities and EM currencies also firmed as the Chinese central bank shored up market confidence by cutting rates.
The Euro's Outlook Depends on the US Fed
Labelling the euro as a ‘safe haven’ asset in these times of Chinese stock market and commodity sell-offs is an obvious one.
But why? Understanding euro demand is key to determining where the currency markets could make a turn-around.
For the British pound and US dollar interest rate expectations are everything; the US Fed was forecast by markets to raise rates in September.
Latest Pound/Euro Exchange Rates
  | Live: 1.144▲ + 0.02%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1051 - 1.1097 |
**Independent Specialist | 1.128 - 1.1326 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The dollar exchange rate family was subsequently bid higher. The pound is being driven by the same dynamic as the Bank of England is expected to follow the US Fed in raising rates.
Now that we have a new global market dynamic in the form of stresses in China, the raising cycle may be delayed.
“The latest rout in Chinese equities and EM currencies may not qualify as ‘market stress’, in the sense of directly posing a threat to the economic outlook and financial stability in the US, but the FOMC will remain wary of potential second-round effects down the line,” suggest Lloyds Bank.
The US currency would normally be expected to rise in conditions where investors flee from risk assets, “but the latest economic data has raised questions about whether the Fed will hold off on raising rates next month (consensus has gone from above 50% to around 30% among analysts for a September rise),” notes Bill McNamara at Charles Stanley in London.
Falling commodity prices are important as they will likely vanquish the threat of rising inflation, remember it is inflation that is the ultimate determinant of higher interest rates at central banks.
Inflation in the UK and US continues to hover around zero and should oil prices take another turn lower inflation could dip again.
There thus remains little incentive to raise interest rates and provide the dollar and pound the support that this naturally brings.
Amidst all this sits the euro with no expectations surrounding interest rates to muddy the waters.
With Greece out of the picture the Eurozone's currency has simply become a bystander which has profited as traders exit more flamboyant competitors.
Euro Forecasts: Topside Seen Against the Pound Sterling
Recent price action in sterling / euro has been erratic to say the least.
"Even so, we have the impression that the topside in EUR/GBP is growing better protected, with important resistance in the 0.7483/0.75 area. Interest rate differentials between the euro and sterling are still substantial and in favour of the UK currency. A cautious sell-on-upticks approach can be considered," says Piet Lammens at KBC Markets.
Euro Forecasts: 1.18 And Above Against the Dollar
"We suspect that any near term correction in EUR/USD proves shallow, e.g. 1.1450/1500, before renewed equity stress prompts a move closer to resistance at 1.1800. Yet the ECB will not be happy with this tightening of financial conditions and it would not be a surprise to hear the ECB starting to discuss the front-loading of QE.
"For today, the macro highlight will be German IFO, which could provide some temporary support if it does not fall too sharply. EUR/GBP looks far too expensive here and 0.7350/7400 looks the medium term sell zone," - ING.
Strategists at the Dutch bank meanwhile confirm they have taken a loss of 0.80% to unwind their EUR/USD short trade (which was zero cost to initiate).
"At the current market environment, we think it is prudent to do. Even though the EUR/USD rebound looks somewhat overdone, things may get worse before getting better," say ING.
"The rally was finally tempered on the north side of the 233day exponentially weighted moving average band (1.1490/1.1615, based on session lows, closes & highs). The wave structure may either be a ‘Double Zigzag’ or a straight ‘A-B-C’ with a more developed 3rd leg higher.
"Either or, it is incomplete as it stands right now, so short-term pinduts will look for the near-term correction lower to fade and develop into a buy (likely around 1.1534/1.1427 and target +1.18." - Anders Soderberg at SEB.
Markets: Another Yuan Devaluation
With the US markets capitulating at the final hurdle last night, and more volatility in the Chinese markets this morning, the European indices opened at a loss this Wednesday.
Another yuan devaluation saw the currency hit a 4 year low, and continued the People’s Bank of China’s scattershot approach to providing aid for its slowing economy and erratic stock market.
Meanwhile Its last move, the PBOC rate cut, was as insufficient as many expected, even if it did arguably prevent a third day of complete collapse for the Chinese markets.
