Article / 20 July 2016 at 8:22 GMT

FX Update: EURUSD teases below 1.1000 ahead of Thursday ECB meeting

Head of FX Strategy / Saxo Bank
  • IMF downgrades global 2016-17 growth projections, citing Brexit concerns
  • EURUSD teases key 1.1000 area ahead of ECB policy meeting Thursday
  • GBPUSD's important 1.3100 area gives way
  • Risks are toward more Fed hawkishness on guidance
Euros and dollars
 EURUSD has gone quiet since the Brexit shock. Image: iStock

By John J Hardy

EURUSD has now teased the key 1.1000 area ahead of the European Central Bank's governing council meeting tomorrow, which is unlikely to deliver anything euro-supportive, while 1.3100 was an important area in Cable that gave way this morning .

The IMF issued a warning on global growth on Tuesday due to the Brexit vote, saying it could mean a 0.1%-point drag on GDP growth and warning of a substantial increase in economic and political uncertainty.

Yesterday the Wall Street Journal’s unofficial mouthpiece, Jon Hilsenrath, pointed to a Fed that clearly disapproves of the market’s assessment of the low probability of a rate hike at coming Federal Open Market Committee meetings.

I mentioned in yesterday’s FX Market Update webinar that the risks are toward more Fed hawkishness on guidance, at least until we get the next round of monthly data, and this fits in with that theme. But see also Bloomberg's article “Why the Fed Can’t and Shouldn’t Raise Interest Rates” (spoiler alert: flattening yield curve compromises banks ability to profit from borrowing short and lending long, the key engine of credit).

A European Union court ruled yesterday that Slovenia’s 2013 bank bondholder bail-in was legal, an interesting development in light of the current urgency of dealing with Italy’s teetering banking system. Italy is an entirely different, too-big-to-fail, story, and a bail-in would be a near term disaster for Italy’s economy, especially if the government is handcuffed from employing fiscal stimulus to offset the risks.

Attention turns today to UK data, though we won’t get a good sense of the shock to UK fundamentals from the Brexit vote until we see July numbers for everything from housing to payrolls next month.

The other notable event risk on today’s calendar is tonight’s Reserve Bank of New Zealand assessment. Has the market over-anticipated the potential dovishness from the RBNZ? Or will the bank’s new macro-prudential focus and clear intention to cut rates more than the market had expected succeed in engineering a further selloff in the currency? We favour kiwi weakness.

AUDNZD up sharply from lows

The stronger US dollar aside, the kiwi has been shocked by the clear shift in the RBNZ’s guidance, sending AUDNZD aggressively higher from fresh lows for the year. The last couple of days have seen a consolidation on dovish developments in the Reserve Bank of Australia's minutes of its July meeting, but we expect the NZD will win the race to the bottom and send AUDNZD higher soon, perhaps triggered by a more aggressively dovish guidance in tonight’s RBNZ economic assessment.

The G10 rundown

USD – fairly persistent strengthening lately, and risks tilting to the hawkish side for next week’s FOMC meeting guidance as the Fed would like to see higher odds of a September hike in case July and August economic data continues to improve on top of a bounce in June.

EUR – the EURUSD chart remains unresolved, but preferring downside resolution as we have now teased the key 1.1000 area. ECB governing council unlikely to say anything supportive of the currency at its Thursday meeting.

JPY – local new highs rejected in USDJPY, but selloffs have been very shallow. More hawkish Fed signals might keep us away from the 100 area in the weeks to come as long as the Bank of Japan is able to introduce enough to keep a fresh wave of JPY buying at bay (more volatility potential around the BoJ meeting.)

GBP – 1.3100 was an important area in GBPUSD that gave way this morning and as we await UK data – important for bears to see follow-through on this break to set sights on lows for the cycle near 1.2800.

CHF – EURCHF remains in 1.08-1.09 limbo. A clearing up of Europe’s Italian banks problem likely needed to see Swiss franc weakness again – more interesting versus the USD if the market continues to price higher odds of a rate hike.

AUD – AUDUSD local trendline in play this morning below 0.7500, but the much bigger level lies lower around 0.7300 as we look for the market to further raise the odds of an RBA rate cut.

CAD – USDCAD remains bottled up in the range, but USD strength showing here, and it is approaching upside break zone at 1.3150+.  The market may insist on waiting for Friday’s Canadian data (retail sales and CPI), though a further oil selloff could also provide a trigger.

NZD – consolidating with a rally after a brutal drubbing, with tonight’s RBNZ economic assessment the next key event risk for the kiwi.

SEK – EURSEK pushing 9.50 , last resistance area ahead of cycle highs above 9.60.

NOK – EURNOK on summer holidays – waiting for signal from oil markets or break of 9.45 or 9.25 to start paying attention.

Upcoming Economic Data Highlights (all times GMT)
  • UK Jun. Jobless Claims (0830)  
  • UK May Average Weekly Earnings (0830) 
  • UK May Unemployment Rate/Employment Change (0830) 
  • Euro Zone Jul. Preliminary Consumer Confidence (1400) 
  • RBNZ Economic Assessment (2100) 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank


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