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The euro fell in early trade this morning and was still coming under selling pressure soon after the US open. The single currency had held up well during the Asian Pacific session but began to retreat once European traders turned on their PCs around 06:00 BST. The euro wasn’t helped by the latest German ZEW Economic Sentiment survey which fell sharply in August, coming in at 10.0 after a reading of 17.5 in the prior month. The comparable survey for the Euro zone slipped to 29.3 from 35.6. Both numbers were also lower than expected. The ZEW survey is considered one of the best forward-looking indicators and this drop, particularly in Germany, suggests considerable nervousness amongst investors and analysts over the outlook for the next six months. This could be due to upcoming elections in Germany (although Chancellor Merkel appears to have steadied the boat for now) or it may indicate more fundamental concerns. ZEW President Achim Wambach blamed weakness in German exports along with the “widening scandal in the German automobile sector.” While the sentiment number remains positive and therefore signals overall optimism, it has dropped off sharply. This would seem to be at odds with the euro’s strengthening since the beginning of the year.

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So the question now is if the euro has much more upside from current levels. Earlier this month the EURUSD briefly broke above 1.1900 to hit its highest level since early 2015. This now appears to be the top of an impressive rally which began at the beginning of this year. In early January the EURUSD hit a 14-year low but it went on to rally around 15% until early August. This led the ECB’s Governing Council (GC) to express concern about “the risk of the exchange rate overshooting in the future.” In the short-term it would seem that investors are unlikely to want to add to their FX exposure much more ahead of this week’s Jackson Hole Economic Symposium and as a consequence the EURUSD appears stuck in a relatively narrow range. Last week sources close to the ECB insisted that President Draghi won’t be using his Jackson Hole speech to detail moves to wind down the central bank’s monthly bond purchase programme. However, some traders believe that this doesn’t preclude him from talking down the euro as the EURUSD gets ever closer to 1.2000. This currency strength hits the Euro zone’s exports with the rest of the world, and also has a dampening effect on inflation. But of course it’s still the case that every country wants a cheaper currency. It’s also a simple fact that if everyone wants the same thing at the same time someone will be disappointed. As things stand the Federal Reserve is actively tightening monetary policy while the ECB is still providing monetary stimulus at the rate of €60 billion per month. Mario Draghi caused a stir back in June when he suggested that growth and inflation were picking up across the Euro zone. However, ECB sources were quick to say he’d been misinterpreted and so dampen down speculation of imminent tightening from the ECB. That seems sensible - even as analysts point out that the ECB is running out of eligible bonds to buy. The fact is that the rules of eligibility can always be loosened, and that could easily happen if Draghi convinces enough members of the Governing Council that there’s not enough evidence of a sustainable pick-up in inflation. So it could be that we’re approaching the top of the euro’s rally this year. Hopefully we’ll know more after Friday’s speeches at Jackson Hole.

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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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