Article / 21 August 2017 at 5:00 GMT

3 Numbers: EURUSD rally may not survive Draghi's speech on Friday

editor/analyst /
United States
  • The Chicago Fed Index's July report will give a fresh profile of the US macro trend
  • Will the 10-year Treasury yield drop below a two-month low this week?
  • The prospects for Trump’s growth agenda look distant given the political turmoil
  • The euro will probably tread water until Mario Draghi gives a key speech on Friday

By James Picerno

The week kicks off with a slow day for scheduled economic reports. The main event for a new batch of hard data: the July profile of the US macro trend via the Chicago Fed National Activity Index.

Meanwhile, keep your eye on the 10-year Treasury yield, which continued its gradual decline last week. In currency markets, EURUSD will be topical ahead of Friday’s speech from European Central Bank President Mario Draghi, who’s scheduled to talk at the Federal Reserve's Jackson Hole conference.


The economic outlook for the US is still positive, but in the current climate there’s a robust appetite for safe havens, including bonds and gold. Photo: Shutterstock

US: Chicago Fed National Activity Index (1230 GMT) The economy continues to expand at a moderate pace, but today’s big-picture review may show a slightly softer trend.

The three-month average of the Chicago Fed National Activity Index (CFNAI) is on track for a fractional dip, according to the implied projection via’s econometric estimate. Although the monthly measure is expected to hold at 0.13, using the forecast to project the three-month average reflects a decline below zero (-0.01), which translates to a below-trend reading.

That’s still firm enough to keep any talk of recession at bay. Only a three-month CFNAI figure that falls below -0.70 signals the start of a new downturn. By that standard, growth remains highly likely for the foreseeable future.

In fact, last week’s update on the Leading Economic Index (LEI) points to faster growth in the months ahead. “The US LEI improved in July, suggesting the US economy may experience further improvements in economic activity in the second half of the year,” said a spokesman at The Conference Board, which publishes the data.

If so, perhaps today’s CFNAI will deliver an upside surprise that keeps the three-month average above zero (and above trend) after all.

US: 10-Year Treasury Yield The benchmark 10-year rate closed at 2.19% last week, posting for a third time this month the lowest level in nearly two months, based on daily data via

The modest downside bias over the past month suggests that there’s still a fair amount of doubt about what’s in store for monetary policy in the near term. The outlook for economic growth remains positive, but recent data suggests that a substantial acceleration in the trend is still a low-probability event.

No wonder, then, that the implied probability that the Fed will leave interest rates unchanged at next month’s Federal Open Market Committee meeting is roughly 96%, according to Fed funds futures at last week’s close. The nearest possibility for tighter policy, according to futures pricing, is in December, when the implied probability rises to just under 40% that the central bank will lift its target rate.

Meanwhile, the prospects for Donald Trump’s pro-growth agenda look ever-more distant in the wake of the latest round of political turmoil in the White House. The president decided to disband two business advisory councils after CEOs of major corporations quit the bodies, citing troubling remarks by Trump regarding the violent protests that involved fascist groups several days earlier.

“This quashes the initially big hopes that Trump could pursue a business-friendly policy,” analysts at Commerzbank concluded. “Ultimately, this could even prove damaging to the US economy.”

Friday’s announcement of the departure of Steve Bannon, a controversial adviser to the president, underlined the risk that political turmoil continues to roil the administration.

The near-term economic outlook is still positive, but in the current climate there’s still a robust appetite for safe havens. The question is whether the demand for Treasuries will heat up this week. A key signal that even lower yields are on the horizon will be triggered if the 10-year rate makes a decisive move towards the previous low point of 2.14% from late June.


EURUSD Has this year’s euro rally peaked? After rising for most of the year, reaching nearly 1.19 in early August, EURUSD has pulled back in recent days and held within a narrow band, closing on Friday at roughly 1.176.

The technical profile still looks strong. However EURUSD is trading well above key moving averages, for instance. The fact that the 50-day average is far above the 200-day average is another sign that upside momentum may be intact.

Yet some analysts have turned cautious after watching the euro tread water in recent days, which has inspired profit taking. Traders are also eyeing this week’s Fed conference in Jackson Hole, Wyoming, where European Central Bank President Mario Draghi will speak. There has been speculation that he might deliver a major speech. Meanwhile, some economists have noted that the currency’s ongoing strength threatens the Eurozone economic recovery.

However a Reuters story published last week downplayed the odds that Draghi’s speech this Friday would dispense a major realignment of policy expectations. “Expectations that this will be a big monetary policy speech are wrong,” said an unnamed source advised.

Perhaps, but traders are likely to adopt a wait-and-see outlook that keeps the euro in place until Draghi speaks.

“Traders have been speculating for some time that Mr Draghi would use the speech as an opportunity to talk about trimming the ECB’s €60 billion per month bond buying scheme, and now it appears that it will not be the case,” an analyst at CMC Markets advised last week.


– Edited by Robert Ryan

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James Picerno is a macro analyst/editor at Follow James or post your comment below to engage with Saxo Bank's social trading platform.


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