Euro’s Prospects Could Brighten If ECB Raises Yield Expectations

EUR/USD

The EUR/USD was battered on the day as a weak attempt from the BoJ to stem Yen strength saw stronger conviction in support for safe haven currencies. The dollar, franc and yen would rebound against the single currency after initial weakness to start the week. A weak U.S. personal income report helped weigh on equity markets as risk aversion remained firm. Although the EUR/USD has seen its relationship with risk weaken from 47% to 43% in the past week, it still holds considerable influence over the pair. However, yield expectations have started to become the main driver of direction and will be in focus this week with the upcoming ECB rate decision. A drop in interest rate expectations at the beginning of August, as the outlook for the global economy dimmed, was a significant weighing factor for the single currency. Therefore, a hawkish central bank could lead to renewed support and a reversal of the prevailing bearish trend.

EUR/USD Sees Relationship With Risk Weaken

ECB Interest Rate Expectations

President Trichet in a speech last Friday at the Jackson Hole conference warned that governments must control their budget deficits despite concerns that the global recovery is faltering. The ECB leader seemed convinced that the economy could handle a reduction in stimulus, and spoke about “reabsorbing excessive liquidity.” A greater than expected rise in Euro-zone economic confidence shows that European businesses and consumers share his optimistic outlook. The German labor market is expected to continue to improve which will raise policy makers concerns over wage inflation, adding to the developing hawkish case. However, we will most likely see the central bank remain on hold at Thursday’s policy meeting as inflation remains tame. Indeed, the EZ CPI –estimate is forecasted to have slipped to 1.6% from 1.7% -well below the central bank’s 2.0% target. However, an upside surprise in inflation will get the committee’s attention and could lead to a change in their prevailing rhetoric that “risks remain balanced”. Discuss this and trading ideas join the EUR/USD forum.

Credit Suisse (OIS) ECB

Source Bloomberg – Prepared by John Rivera

FOMC Interest Rate Expectations

Expectations for a Fed rate hike remain non-existent as we have to look out to January to find only a 1.5% chance according to Fed fund futures. The central bank is looking to the labor market for its cue and with Non-farm payrolls expected to have declined by another 100,000 in August the outlook for yields will remain dim. A forecasted slowdown in the manufacturing and service sectors will only add to the dovish outlook which could become a weighing factor for the dollar.

Source Bloomberg – Prepared by John Rivera

Risk

U.S. personal income in July grew by 0.2% from the month prior but missed expectations for a 0.3% gain which was enough to start stocks off on the wrong foot for the week. The disappointing report only added to signs that the recovery is faltering and with weakness in the labor market and manufacturing expected in August, risk aversion may become the theme of the week. The Dow is re-testing the 61.8% Fibo of its July rally at 10,036. Psychological support at 10,000 remains a formidable level which could stem losses. However, a break below opens a clear path to 9,600. Discuss this and other fundamental data in the Economics Forum.

Dow (Daily)

Source Bloomberg – Prepared by John Rivera

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