Fundamental Forecast for EUR/USD: Neutral
– EUR/USD traded to uninformed yearly highs final Tuesday, though sealed a week in a red after a Aug US NFP news on Friday.
– The subsequent pierce in a Euro will be unconditionally dynamic by what happens during a European Central Bank’s Sep process assembly this Thursday.
– Retail positioning continues to prove that positioning is stretched in EUR-crosses, though a trend hasn’t capitulated yet.
The Euro had a rather dull week, finishing precisely in a core of a container in terms of opening among a vital currencies lonesome by DailyFX Research. Yet a trade conditions were standard for this time of year, a final week of summer: low volatility, even reduce participation, and few suggestive drivers of cost movement that could invert trends in a market. All of that will change once we get past Labor Day in a United States on Monday, and a Euro will be front and center.
The European Central Bank process assembly this entrance Thursday is one of a 4 meetings any year that new staff mercantile projections (SEPs) are produced, that raises a stakes extremely for a week ahead. Yet distinct a past few process meetings, where even a releases of a SEPs felt some-more like placeholders than anything, a entrance rate preference this Thursday could have element consequences that camber over a subsequent few days.
To know where a ECB competence take us this week, it’s critical to know a context of where we’ve been in new months.With a ECB still for some time about a FX channel, a Euro had been given some respirating room to convene opposite a peers given April, when domestic risk in a Euro-Zone dissolute alongside Marine Le Pen’s French presidency hopes. Now that EUR/USD has traded above 1.2000 as recently as final week, a ECB simply can’t means to stay still on a FX channel any longer.
Why? Per a final SEPs released during a ECB’s Jun process meeting, the ECB’s technical arrogance for EUR/USD in 2017 is 1.0800. Were EUR/USD to stay around these stream levels by a finish of 2017, a sell rate could hit off around -0.5% from title acceleration and -0.1% to -0.2% off of title GDP (vis-à-vis exports). Considering that expansion in a Euro-Zone has usually started to reason above +2%, and CPI is hardly over half of a ECB’s +2% target, any serve Euro strength (particularly in EUR/USD) will usually mystify a ECB’s ability to grasp a process goals. From this perspective, a biggest snag to serve Euro gains might indeed be a Euro itself.
The developments over a past few months leave ECB President Draghi in a unsafe situation. How a Euro will conflict this week can be placed on a continuum. At a many ‘bullish end’ of this continuum would be for a ECB to surprisingly announce a QE finish and downplay any regard about serve Euro appreciation. At a many ‘bearish end,’ a ECB would downplay tapering a QE module and ECB President Draghi would spend a poignant apportionment of his press discussion deliberating a risks a fast rising Euro poses to a ECB’s process goals.
The ongoing alleviation in a Euro-Zone means that is expected to change out his short-term regard over Euro strength with medium-term hopes that expansion conditions will continue to improve. Ultimately, this might meant that a ECB decides to abstain announcing a subsequent proviso of a QE finish during a assembly this week and punt on that preference until a subsequent turn of SEPs in December.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
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