Fundamental Forecast for EUR/USD: Neutral
- The Brexit negotiations remain a potent catalyst, evidenced by the sharp turnaround in EUR/GBP following comments by the EU’s Barnier last week.
- A fresh wave of weakness among emerging market economies is weighing on EUR/USD again, just like at the start of August.
- The IG Client Sentiment Index remains ‘neutral’ for the Euro after flipping from ‘bearish’ in mid-August.
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The Euro finished in the middle of the road last week, gaining ground against three major currencies while falling against four others. Two of the major themes guiding the Euro in recent weeks made pronounced developments last week, providing EUR-crosses all the ammunition needed for more significant volatility to end August. Moving forward, the same influences will reign supreme as the calendar moves into the last month of the third quarter.
Looking into September, any signs that the possibility of a hard Brexit are diminishing will continue to weigh on EUR/GBP in a meaningful way. The final week of August saw EUR/GBP slump by -1.00% after the EU’s chief negotiator on Brexit, Michel Barnier, said that the EU was “prepared to offer Britain a partnership such as there never has been with any other third country.” And vice-versa: should no agreement come to fruition in the coming weeks, any goodwill established at the end of August that saw EUR/GBP lower could easily produce higher EUR/GBP rates in September.
The other major influence traders need to watch for is how European Central Bank policy evolves as a result of the potential contagion impact the Turkish Lira meltdown may yet bring. According to the Bank of International Settlements, Turkish borrowers owe European lenders $194 billion, much of which is unhedged. As such, any sustained depreciation by the Turkish Lira could very well set off a wave of defaults on these obligations, forcing European banks to write down bad loans. The erosion of excess capital held by European banks could give the ECB pause to its current plans to wind down its QE program by December 2018 and raise rates by “summer 2019.”
Otherwise, outside of the Brexit negotiations and potential contagion from Turkey – which has clearly manifested itself in ways beyond the Euro, given the widespread issues plaguing emerging market currencies – there is very little by way of the calendar to look for that could catalyze price action in the week ahead: there are no ‘high’ rated events in the first full week of September; and the ‘medium’ ranked data releases fall lower on the scale of importance unto themselves.
If the calendar does produce any action, it will likely be around either the July Eurozone Retail Sales report due on Wednesday or the final Q2’18 Eurozone GDP release on Friday (which is the third iteration of the report, so it should have a muted impact overall).
Finally, positioning warrants a quick mention, if only for record keeping. According to the CFTC’s COT report released on Friday, speculators held net-short positions in the Euro for the first three-week period going back to April 2017. For the week ended August 28, 2018, there were 7.2K net-short contracts held, a slight increase from the 4.8K contracts held in the week prior. For the foreseeable future, especially through September, positioning is a non-factor for the Euro.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at cvecchio@dailyfx.com
Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX.
