Talking Points:
- Market sees around a 40% chance of an ECB rate cut by year end.
- EUR/USD trapped in range around $1.1120/1.1370.
- As market volatility is set to rise with summer ending, it's a good time to review risk management principles.
August was a quiet month thus far for the Euro, news wise, but this may simply have been a function of an exhausted market participant population taking summer holiday. Now that the European masses are returning from their getaways, attention should quickly return to the consequences of Brexit, Italy’s upcoming constitutional referendum, and the march to elections in the European core.
Amid the lack of news the past few weeks, there has been a deterioration of economic data relative to expectations. The Citi Economic Surprise Index for the Euro-Zone has edged lower from +28.3 on July 29 to -13.6 today. Concurrently, with energy prices behaving erratically once again, inflation expectations have been driven lower. The 5-year, 5-year inflation swap forwards, a market measure of inflation expectations, fell back to 1.301% today, from 1.340% on July 29.
These subtle shifts in market indicators over the past few weeks warns that, in the absence of news otherwise, the recovery in Europe remains weak and fragile. Complacency is running higher, which breeds opportunity for surprise and disappointment. Should data continue to miss expectations, there’s plenty of room for markets to speculate on more dovish policy action by the ECB – after all, there’s approximately a 41% chance of a 10-bps rate cut by this December (per OIS).
See the above video for a technical review of the USDOLLAR Index, EUR/USD, GBP/USD, AUD/USD, USD/JPY, and USD/CAD.
Read more: GBP/USD Volatility Rises as BOE Policymakers Speak on UK Post-Brexit Vote
--- Written by Christopher Vecchio, Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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