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EURUSD hovers around 1.1800 - AM Briefing
29 Sep 2017
Trump tax reform lifts Wall Street - AM Briefing
28 Sep 2017
What is the Fed trying to tell us? - PM Bulletin
27 Sep 2017
Yellen struggles with inflation - AM Briefing
27 Sep 2017
Can cable’s rally continue? - PM Bulletin
26 Sep 2017
Investors jittery after North Korean threat - AM Briefing
26 Sep 2017
EURUSD slips again - PM bulletin
25 Sep 2017
Merkel scrambles to form coalition - AM Briefing
25 Sep 2017
Caution ahead of weekend - AM Briefing
22 Sep 2017
Fed Meeting Post-Mortem - Video Update
21 Sep 2017
Fed signals another rate hike - AM Briefing
21 Sep 2017
Trading subdued ahead of Fed meeting - Video Update
20 Sep 2017
Fed expected to reduce balance sheet - AM Briefing
20 Sep 2017
FOMC and balance sheet reduction - PM Bulletin
19 Sep 2017
Dow hits fresh record high - AM Briefing
19 Sep 2017
EURUSD continues to trend higher - PM Bulletin
18 Sep 2017
Global indices storm higher - AM Briefing
18 Sep 2017
Investors shrug off NK missile test - AM Briefing
15 Sep 2017
Sterling soars after BoE meeting - Video Update
14 Sep 2017
Bank of England meeting in focus - AM Briefing
14 Sep 2017
Look-ahead to the BoE monetary policy meeting - Video Update
13 Sep 2017
Sterling bounces as inflation picks up - PM Bulletin
12 Sep 2017
Wall Street rally lifts sentiment - AM Briefing
12 Sep 2017
Euro storms higher - AM Briefing
08 Sep 2017
ECB meeting in focus - AM Briefing
07 Sep 2017
EURUSD soars during Draghi’s press conference - Video Update
07 Sep 2017
ECB meeting, a look-ahead to Thursday - Video Update
06 Sep 2017
Wall Street wobbles, but closes off lows - AM Briefing
06 Sep 2017
WTI recovering as clean-up continues - PM bulletin
05 Sep 2017
Investors shrug off North Korean threat - AM Briefing
05 Sep 2017
North Korean nuclear test boosts gold - PM Bulletin
04 Sep 2017
North Korea rattles markets - AM Briefing
04 Sep 2017
High hopes for the latest US jobs release - AM Briefing
01 Sep 2017
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 Monday 25 September 2017

EURUSD slips again - PM bulletin



Madrid’s heavy-handedness looks likely to backfire and this could bolster the independence vote.

We last looked at the EURUSD a week ago, just ahead of the US Federal Reserve’s key monetary policy meeting. This was when the Fed’s FOMC released its statement together with its quarterly Summary of Economic Projections. The projections were considered more hawkish than expected, principally because of the latest update to the FOMC’s “dot plot”. This showed that there has been a hardening in expectations of committee members that there will be a 25 basis point rate hike before the year-end. In addition, the FOMC still anticipates a further three quarter point rate hikes in 2018, so potentially taking the fed funds rate band up to 2.00/2.25% by the end of 2018 from 1.00/1.25% currently. All this came on top of the US central bank announcing that it would start the process of balance sheet reduction next month - as expected. The initial reaction was that the Fed was more hawkish than expected and this led to a counter-trend rally in the US dollar. The EURUSD lost well over a cent in the immediate aftermath of the Fed’s releases, pulling back below 1.2000.

But that was the knee-jerk reaction on Wednesday. Later, as analysts spent a little bit more time and effort pouring over data, it was clear to see that the longer term forecasts showed that the FOMC had actually reduced its interest rate expectations. The FOMC view is for a fed funds rate of 2.8% out beyond 2020 - down from 3.0% in June. In fact, the whole fed funds curve was nudged down and was therefore dovish if anything, helping to explain why the dollar fell sharply at the end of last week.

But Sunday’s German election results have led to a sharp sell-off in the euro. Angela Merkel looks set to clinch the Chancellorship for the fourth successive time. However, her party (CDU) notched up its worst performance in nearly 70 years. The CDU and its sister party the CSU won 33% of the vote, down from 41.5% four years ago. Merkel’s junior coalition partners (the SPD led by Martin Shultz) also haemorrhaged support and have announced they will now go into opposition. Meanwhile the far-right AfD won 12.6% of the vote, finishing third overall. This fractured result means that Merkel will have to use all of her political nous to form a working coalition. The concern is that this could take a while.

There are also concerns that the Catalonian referendum on independence from Spain which takes place on 1st October could cause significant problems for the European Union (EU). What is a particular worry is the Spanish government’s aggressive response to the referendum which it says illegal and which it has tried to stop. Madrid’s heavy-handedness looks likely to backfire and this could bolster the independence vote.

The point is that that the EU has become complacent recently as anti-European parties failed to make a mark in either Dutch or French elections. But the EU was wrong to write off citizen dissatisfaction just because there was no political upset equal to the Brexit referendum. The AfD’s vote share in the German election and the upcoming Catalan referendum are both manifestations of this.

As we can see from the chart the EURUSD has struggled to break above 1.2000 and appears to be topping out. However it remains in an uptrend even though it is testing support at the lower trend line of the Andrews’ Pitchfork. Nevertheless, the bigger test of support comes in around 1.1800 and a significant break below here may signal that the EURUSD uptrend since the beginning of the year could be coming to an end.

In the meantime here are a few economic data releases which could prove significant. There’s a quiet start to the week but we have Durable Goods on Wednesday, US final GDP on Thursday and the Fed’s preferred inflation measure, Core PCE, on Friday. On top of this, tomorrow Federal Reserve Chair Janet Yellen is due to deliver a speech called "Inflation, Uncertainty, and Monetary Policy" at the National Association for Business Economics Annual Meeting.



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Posted by David Morrison

Category: PM Bulletin

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