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For much of this week, the EUR/USD has been edging lower with the US dollar regaining some ground after last week’s sell-off that was triggered, in part, by the bond market worries. Investors have been unwilling to bet further against the US dollar so far this week ahead of Kevin Warsh’s keynote speech at the Jackson Hole summit, due later today.
This week’s main theme has been a drive away from the dollar and into currencies of economies with better fiscal discipline and lower debt levels. The short-lived rally in US long-dated bonds fuelled rallies in gold and silver prices, which, along with the like of Swiss franc, benefitted further from increased haven flows.
Today’s US jobs report was the first of the four major releases before the Fed’s next meeting in September. As it turned out, this was a pretty bad report and as a result, the odds of a September rate hike fell to around 44% from north of 55% before the data was released.
Although this week’s softer US inflation readings briefly encouraged hopes that the Fed may not have to tightening after all, the renewed rise in oil prices has complicated that narrative and prompted investors to reassess the outlook. As such, they have found it difficult to justify shorting higher-yielding currencies or buying low or zero yielding assets. This narrative is unlikely to change much until there is genuine breakthrough in the tension between the US and Iran.
Although this week’s softer US inflation readings briefly encouraged hopes that the Fed may not have to tightening after all, the renewed rise in oil prices has complicated that narrative and prompted investors to reassess the outlook. As such, they have found it difficult to justify shorting higher-yielding currencies or buying low or zero yielding assets. This narrative is unlikely to change much until there is genuine breakthrough in the tension between the US and Iran.
With US financial markets closed for the Independence Day holiday, trading conditions will be considerably thinner today. Reduced liquidity often exaggerates price swings and creates favourable conditions for official intervention in the foreign exchange market…
Earlier today, the US dollar found renewed support after oil prices rebounded on fresh doubts over a US-Iran deal, while equity markets held steady amid the SpaceX IPO enthusiasm. But moments ago, Iran’s foreign minister delivered hope, with a social media post suggesting that the Memorandum of Understanding “has never been closer.”
The US dollar and financial markets will face a busy week ahead. We will maintain a largely bearish dollar forecast but the greenback’s performance will be mixed against different currencies. A potential in-line CPI report should not move the needle much today given the Fed’s focus has shifted to employment now.
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EUR/USD forecast hinges on continued weakness in US dollar than necessary euro strength. Core PCE and Fed speakers in focus as rate cut speculation lingers.
