(September)Reading time about 4 minutes
A stronger euro suggests the ECB under-delivered. But longer-term, we expect the single currency to pull back, with no end in sight to monetary easing
USD: Data to stay constructive
A report that the US administration is working on an interim deal with China to delay tariffs has been contributing to a broad risk-on mood in the market, with USD / CNH edging below 7. 05 for the first time in a month. Today, the price action in the dollar should be dominated by the data flow. The strong job market and wage growth should offset hobbling consumer confidence and keep retail sales numbers fairly robust in the August report released today. Ultimately, this may argue in favor of cautious policy easing from the Federal Reserve rather than more aggressive steps as called for by President Trump. The University of Michigan 1500 BST) sentiment indicator will also be watched, and should show a rebound in August. USD likely to stay supported across the board today.
EUR: ECB QE no game changer for EZ economy, still points to lower EUR
The European Central Bankcut interest rates by 10 basis points on Thursday, announced € 20 billion of bond buying per month (with no time limit), a tiering system and a repricing of cheap loans known as Targeted Longer-Term Refinancing Operations (TLTROs). The euro (and eurozone rates) “enjoyed” a rollercoaster ride in intraday-price action. After the announcement, the pair suffered a knee-jerk drop to 1. 0930, likely on the back of the “open-ended” character of the announced quantitative easing. Mario Draghi’s press conference, however, failed to feed EUR bears as he admitted no discussion about a revision of the asset purchases limit had taken place. That was likely an eye-opener for markets which jumped back on EUR longs, pushing the currency well above the pre-meeting levels. A stronger EUR endorses the notion that the ECB has under-delivered compared to the highly dovish market expectations. However, looking ahead,we expect the common currency to move in the opposite directionand we still see EUR / USD in the 1. – 1. 10 Range for the remainder of the year. The main reason is that the package delivered by the ECB may well not be enough to trigger a turnaround in the battered eurozone economy and subdued inflation outlook, which suggests that the end of monetary stimulus is nowhere in sight. The growth divergence with the US is likely to remain sizeable (despite signs of slowing American activity) and the same should be true for the rate differential, especially as some resilience in US inflation (and the risk of stagflation) may suggest less aggressive Fed easing ahead . EUR / USD will likely be followed lower by the highly-correlated central and eastern European FX segment. For today, EUR should hold its gains.
GBP: Another quiet day ahead
The latest rulings by the Scottish and Northern Irish courts on Parliament’s suspension and a no-deal Brexit had little spillover effect on GBP. We expect sterling to stay range-bound today bar any key development in the Brexit story.
CHF: Upside potential
In line with our weaker EUR view, we remain of the idea that the Swiss franc may come out as a key underperformer, mostly benefiting from the worsening eurozone economic outlook and a possible further escalation in trade tensions.