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Euro-Dollar Resilience sees Euro Outperform as Risk Aversion Follows Hint of Fed Policy Shift

- EUR/USD slips below 1.17 but outperforms with safe-havens
- As global markets sour after FOMC signals 2021 taper caper
- Asia slowdown, virus worries also cited for risk asset losses

Euro-Dollar resilience

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  • EUR/USD reference rates at publication:
  • Spot: 1.1696
  • Bank transfers (indicative guide): 1.1287-1.1369
  • Money transfer specialist rates (indicative): 1.1590-1.1614
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The Euro-to-Dollar rate reached new 2021 lows in the penultimate session of the week although declines were limited and helped to make the Euro an outperformer as other currencies came off the boil amid risk aversion in global markets and expectations of a policy shift at the Federal Reserve (Fed).

Europe’s single currency rose against all counterparts in the G10 contingent of major currencies on Thursday with the Japanese Yen and Swiss Franc the only exceptions after the Euro-Dollar rate dipped by a mere fraction of a percentage point for bids and offers to be accepted a tad below 1.17.

Euro-Dollar reached intraday lows of 1.1663 ahead of the European open, its lowest since November 2020, but pared declines in the ensuing session while other currencies succumbed more readily to widespread risk aversion and a renewed advance by the U.S. Dollar.

“Fed officials are ready to taper before the end of this year, a somewhat more hawkish twist than perhaps the market was expecting and a reminder of the fact that the Fed is readying tightening measures even as the Delta variant and other concerns proliferate. Many cyclical commodities remain very much on their back foot,” says Steen Jackobsen, chief investment officer at Saxo Bank.

EURUSD hourly

Above: Euro-Dollar rate shown at hourly intervals alongside 02-year U.S. government bond yield.

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“EURUSD has broken down below the key 1.1700 area, setting up a possible run toward at least the 1.1600 area, a major low in late 2020, and possibly the next psychological target into the round 1.1500 level,“ Jakobsen adds.

Price action came after minutes of July’s Federal Reserve meeting revealed that a majority of the bank’s policymakers thought last month that the necessary economic conditions would likely be in place for them to announce as well as commence the process of winding down the bank’s $120BN per month quantitative easing programme before year-end when previously many had anticipated that part would be left until the New Year.

“With concerns about Covid and growth in Asia, oil prices are at their lowest since May, and risk is firmly ‘off'. Surprisingly robust Australian jobs data had no impact, any more than the news that Norges bank is on track to raise rates next month,” says Kit Juckes, chief FX strategist at Societe Generale.

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“I'm tempted to think that the recent pattern of marginal new highs by the dollar followed by a period of choppy trading, will continue, and will edge EURUSD down to 1.16, or even a bit below that, in the coming couple of weeks. A bigger move just doesn't seem warranted, until Fed rate hikes are much closer. Our forecasts look for a break lower in EUR/USD in 2022, and maybe it starts a bit before that, but not much,” Juckes says.

Economic turbulence in Asia and emerging concerns about the efficacy of coronavirus vaccines were also cited as factors likely driving widespread declines in stock markets across the world as well as losses for commodity prices on Thursday, though the Euro was weathering the souring of sentiment better than many other currencies by the midpoint of the European session.

“Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum employment goal,” minutes of the Fed’s July 27-28 meeting read.

Above: Euro-Dollar rate shown at hourly intervals alongside AUD/USD.

The currency market had approached Wednesday’s release of last month’s meeting record with only a faint hope that some kind of hint about the likely timing of any change to Fed policy would be revealed, although the market was more than indulged by the bank on the day.

With only three more FOMC meetings left to go in the year, and the bank having made a commitment to provide advanced notice before beginning to reduce its footprint in the bond market, it’s possible if not likely the Fed could announce a tapering plan in either September or November.

This is after the Fed judged that the economy is close to meeting predefined targets for “substantial further progress” toward full employment and a sustainable attainment of its 2%-average inflation target in preceding months, although that was the stance of Fed policymakers before this month’s non-farm payrolls report showed the U.S. economy creating close to a million jobs for the second consecutive month in July.

“The minutes will raise some uncertainty ahead of the September FOMC meeting of action being taken then. However, the Delta variant today is certainly a more prominent risk than it was on 28th July when this meeting was concluded and hence we would expect greater caution on acting sooner than expected,” says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG.

“The US dollar and the performance of risk assets matters quite a lot when it comes to inflation expectations and the Fed will need to thread carefully,” Halpenny writes in a morning note to clients.

Dollar index weekly

Above: Euro-Dollar rate shown at weekly intervals alongside U.S. Dollar Index.

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