- EUR/USD could benefit from PBoC's support for RMB
- Possible scope for a corrective rebound into mid-month
- But market bearish on EUR/USD outlook into year-end
- As economic headwinds mount & Fed policy aids USD
- U.S. ISM surveys, Fed speak & payrolls also in focus
The Euro to Dollar exchange rate has had little reason for cheer of late but there is a chance that it could benefit notably in the weeks ahead if the Peoples' Bank of China (PBoC) remains serious about stabilising a closely-correlated Renminbi heading into a highly important event in the Chinese political calendar.
Last week's sabotage of the Nordstream pipelines has intensified the energy headwinds facing Europe's economies just as an escalating inflation problem heaps further pressure onto the European Central Bank (ECB) in what are all around negative outcomes for the European single currency.
These developments have merely further emboldened what was an already bearish analyst community in which some forecasters are now looking for the single currency to shed another 8% by year-end, which would take the Euro's losses to more than 20% for 2022.
"We expect EUR/USD to head to 0.90 by year-end and GBP/USD to fall to 0.975 over the same period: big moves with many risks along the way," writes Jordan Rochester, a G10 FX strategist at Nomura, in research last week.
"Our view is driven largely by: 1) collapsing trade balances in Europe and a regime change for USD, with an increase in US exports of oil and LNG; 2) falling global growth expectations weighing on pro-cyclical currencies (e.g., the GBP) and 3) rising credit risks and market stress to come," he explained.
Above: Euro to Dollar rate at hourly intervals with upside down Dollar-Renminbi rate and Fibonacci retracements of last week's recovery indicating possible technical supports for the single currency. Click image for closer inspection.
But despite what is a commonly perceived bearish outlook, there may be scope for the Euro to benefit in the short-term from any possible attempts by the Peoples' Bank of China (PBoC) to halt declines in the Renminbi during the current Golden Week holiday and leading up to a highly important political event mid-month.
This is after Reuters cited four sources last Thursday for reporting that state-owned banks in China had been instructed to prepare to sell Dollars in order to support the Renminbi, which potentially has implications for other parts of the China Foreign Exchange Trade System (CFETS) index.
Thursday's Reuters report is just one of several indications suggesting the PBoC's tolerance for Renminbi losses has all but evapourated and given the extent to which the Chinese currency is able to influence others, this is a potentially favourable development for the Euro.
"There has been talk in the market of Chinese banks being asked last week to maintain the USD/CNY exchange rate close to the daily fix rate as Beijing continues to lean against the uptrend," says Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
Above: Euro to Dollar rate at 4-hour intervals with upside down Dollar-Renminbi rate and Fibonacci retracements of last week's recovery indicating possible areas of technical support for the single currency. Click image for closer inspection.
Speculation about the prospect of intervention has followed a lengthy depreciation of the Renminbi and comes at a point in the domestic calendar when local policymakers are most likely to want to encourage stability in the managed-floating Renminbi complex.
It also comes at a point when the Dollar is elevated near two-decade highs against many currencies and with speculators sitting on top of substantial 'long' positions or bullish bets on the U.S. unit, which potentially leave the greenback susceptible to profit-taking by speculative punters in the short-term.
"The remaining stock of unspent savings is now $1.4T—that’s 5.6% of GDP—rather than $2.1T, or 8.3% of GDP. We don’t know where the savings rundown will stop, and neither does anyone else; households’ finances have never looked anything like this," says Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics.
"The risk of falling GDP in the third or fourth quarters is low. The turnaround in net trade means that headline growth in the third quarter will look quite solid—note that the Atlanta Fed’s GDPNow estimate for Q3 jumped to 2.4% on Friday, from its previous 0.3% projection," he said of the U.S. economy on Friday.
Above: Euro to Dollar rate at daily intervals alongside upside down Dollar-Renminbi rate and with Fibonacci retracements of August fall indicating possible areas of technical resistance for the single currency. Click image for closer inspection.
That was the Federal Reserve's (Fed) preferred measure of inflation, which came against a backdrop of yet more hawkish commentary from members of the Federal Open Market Committee (FOMC) or interest rate setters.
None of that bodes well for the U.S. Dollar during the week ahead when economists will be looking to the September editions of the Institute for Supply Management (ISM) surveys of the manufacturing and services sectors as well as last month's non-farm payrolls report for clues about the economic outlook
These are interspersed with a large number of FOMC members who're also scheduled to speak publicly about various topics over the coming days and during a period in which the European economic calendar offers little of significance for the single currency.
"Persistence in elevated core inflation is pushing the Fed into a faster, steeper, and more extended rate hiking cycle, and pushing USD higher across the board in the process. But on the geopolitical front, concerns over Ukraine as well as the European energy situation continue to grow," says Athanasios Vamvakidis, head of G10 FX strategy at BofA Global Research.
"Rate differentials, terms of trade, risk sentiment and weak growth in China fully explain the USD strength so far. However, some of the risks for further upside that we have been flagging have now materialized. US core inflation is yet to peak. The Fed has become increasingly hawkish as a result, and our economists now expect a terminal rate as high as 5%," Vamvakidis and colleauges said last week after cutting their year-end forecast to 0.95.