There was plenty of action to welcome us into the week and all angles were covered from central bank speakers, fundamental data and geopolitical turmoil. On the politics front the euro started the week under some pressure following the rise in far-right popularity in Germany, with the ADF party getting seats in parliament and diluting Merkel’s leadership.
The euro also found some downside pressure as a result of comments made from the ECB President Mario Draghi and a weaker than expected German IFO print. We’ve been noting the ECB’s cautious approach in our morning commentary for several months and while the euro continues to rise, ECB comments sounded more cautious. Draghi’s comments were in line with this, again suggesting that the ECB “can’t afford hasty moves” on monetary policy and trying to ease markets as they expect a taper announcement in October.
Back to geopolitical tensions and we turn to the US now where Donald Trump’s twitter actions continue to draw attention, with the North Korean Foreign Minister stating that Trump’s weekend threats were an act of war, threatening to shoot down US jets/bombers even if not in NK airspace. Needless to say this wasn’t greatly received in markets and risk aversion was the name of the game from there. JPY immediately rallied across the board as the go to save haven, while gold also found itself in demand. Stocks were in the red in the US down over .5% the day before some recovery into the close. Things were weaker overnight but my screens are beginning to show some green this morning across indices.
EURUSD touched 1 month lows this morning as it breaks back below trending support currently holding below 1.1830. Let’s highlight why the euro has rallied so firmly through the summer; Eurozone data has continued to impress to the upside in recent months while the ECB have suggested that they will need to discuss winding down easing eventually. This saw markets begin the price in a full taper effect, expecting the ECB to reduce their monthly purchases from €60bln to €40bln. However as the months have rolled on it would appear the current course of purchases will remain at €60bln until the end of December. Anything beyond that amounts to additional easing and even should the ECB reduce the size of monthly purchases, they are still operating accommodative policy to support the economy. Draghi and other ECB officials have been highlighting lately that it is this accommodation that has helped the Eurozone recovery, and while conditions have improved they would be hesitant to remove accommodation and risk stalling recovery. Markets are looking for and end fate to asset purchases and a reduction in size from the October ECB meeting, Draghi and Co appear to by trying to cushion the disappointment, euro yields have been falling and as such the euro has found some selling pressures. First major support for EURUSD comes in around the 1.1678 area, while any rally towards 1.2000 will almost certainly find euro sellers emerge. EURGBP also continuing to try and break down at 10 week lows. Again any rally towards .8800/.9000 area finds euro sellers. Some light support at .8745 and 0.8716 area may hold EURGBP up, but .8691 is where we are targeting the move lower.
It is an active calendar from the US today and we’ve had several Fed speakers cross the wires over the last 24 hours, with more due today. The USD index pressed to fresh three week highs, partly helped by surging oil prices, partly risk aversion well partly because the USD had nowhere else to go especially against higher yielding currencies facing selling on the broader risk off move. The greenback was only outperformed by CHF and JPY in trade yesterday despite comments from a couple of dovish Fed members (Evans and Kashkari) who both pointed to stubborn inflation and slower growth as rationale to hold off on raising rates for now. However it was the Feds Dudley who sounded hawkish tones and helped the USD higher on the day. US consumer confidence and a speech from Fed Chair Janet Yellen on inflation, uncertainty and monetary policy will highlight this afternoon’s action. GBPUSD just about holding on to its 10 day range, the lows are getting lower however and a break back below 1.3450 area may well see additional declines. Any rally towards 1.3600 once again will favour GBP sellers re-emerging.