Euro Shows Signs of Decoupling from Risk, Will it Continue?
The EUR/USD build upon recent gains today as the pair benefitted from renewed optimism on the back of a hawkish RBA. The Australian central bank left their target rate unchanged but hinted at future tightening which was perceived as a vote of confidence for the global economy. The Euro has been in a bullish trend as the concerns over the sovereign debt and European banking system have started to dissipate. EUR/USD support has come in spite of slumping stock markets and the 46% correlation the posses. Although, the relationship has weakened from a week ago when it peaked at 50% it still remains a driver of price action and must be accounted for when taking position in the pair. However, the recent decoupling is evidence that Euro support can exist when risk aversion grips the broader market. A brighter picture for the Euro-zone has been a driving force for the single currently and interest rate expectations increasing their correlation to 45% from 37% a month ago. However, we have see yield expectations start to turn lower which could be an ominous sign for the Euro.
ECB Interest Rate Expectations
European fundamental data has shown that the region’s economy may have more resiliency than expected with investor confidence improving to -1.4 versus expectations of a decline to -5.0, an upward revision in the PMI services reading for June and May retail sales just missing the monthly forecast. However, we have seen interest rate expectations slip with overnight index swaps pricing in 37.1 bps of tightening over the next year down from 46 two days ago. The ECB will decide on future monetary policy on July 8th with economists expecting that the central bank will keep rates at 1.00%. Markets will look for any deviation from President Trichet’s post release comments from the ongoing rhetoric that interest rates are appropriate as risks between inflation and growth remain balanced. Discuss this and trading ideas join the EUR/USD forum.
FOMC Interest Rate Expectations
A disappointing ISM reading in the service industry added to the weakness that was seen in manufacturing and the labor market last week, pointing to a slowing U.S. economy. The service sector accounts for the majority of GDP and a slowdown in its expansion from 55.4 to 53.8 supports the argument that downside risks exist for growth. The Fed has maintained their language that rates will remain low for an extend period which has put our focus at least three months for tightening to begin. Looking as far out as December we see that Fed fund futures are only giving a 17.1 % chance of a change in policy down from 31.2% a month ago.
U.S. equity markets took the torch of risk appetite from European markets sending stocks soaring. However, a disappointing service sector reading ultimately was a reminder that growth remains fragile leading to indices erasing earlier gains. We could bearish momentum continue which could be a weighing factor for the EUR/USD. The 38.2% Fibo of the 6469-11,258 rally could prove to be formidable support which could be a positive for the pair which has shown resiliency to growing pessimism. Discuss this and other fundamental data in the Economics Forum.
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