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4 Reasons Why Euro Took A Hit

By Kathy LienForexAug 22, 2017 16:06
ca.investing.com/analysis/4-reasons-why-euro-took-a-hit-200196022
4 Reasons Why Euro Took A Hit
By Kathy Lien   |  Aug 22, 2017 16:06
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By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

After hitting a high of 1.1825, the euro sapped a two-day rally to end the day lower against the U.S. dollar. Unlike other major currencies, there were no less than 3 reasons why euro came under selling pressure on Tuesday. First and foremost, were it not for the U.S. dollar trading higher against all of the major currencies, we probably would not have seen EUR/USD turn lower. Eurozone data also missed expectations with the expectations component of the German ZEW survey falling to 10 from 17.5. Although investors feel good about how the German economy is performing now, they have not been this weary of the country’s outlook since October 2016. The expectations component of the Eurozone’s ZEW survey also fell to its lowest level since April 2017. Third, German yields were flat on Tuesday while U.S. yields were up significantly, which means the yield spread is pressuring EUR/USD lower. Last but certainly not least, the euro appreciated significantly this year and it is this very strength that makes investors nervous about how hawkish ECB President Draghi will sound at Jackson Hole. Looking ahead, Eurozone PMIs are scheduled for release Wednesday and the decline in the ZEW surveys along with the drop in the industrial production report puts the odds in favor of softer releases. For the most part, we believe EUR/USD peaked in early August at 1.1910 and the path of least resistance for the currency pair should be lower.

There are also a few reasons why the U.S. dollar is trading higher against all of the major currencies.
Investors were relieved that there wasn’t any fresh antagonism from North Korea and President Trump did not make any inflammatory comments in his speech overnight. U.S. yields ticked higher and should continue to do so leading up to Jackson Hole, where the central bank is expected to prepare the market for balance-sheet adjustments. As such, we expect USD/JPY to test 110. There were 2 pieces of U.S. data released Tuesday – the House Price Index and the Richmond Fed manufacturing index and neither were particularly market moving. House-price growth slowed slightly while manufacturing activity held steady. Markit Economics’ manufacturing, services and composite indices are due for release on Wednesday along with new home sales. Fed President and FOMC voter Kaplan is scheduled to speak Wednesday and based on what we’ve heard so far, he’s more concerned about inflation and believes the Fed should think twice before raising interest rates.

Tuesday's most important piece of data came from Canada.
Although retail sales growth slowed to 0.1%, excluding auto sales, they rose 0.7%, which was significantly stronger than the market’s 0.1% forecast. This was the healthiest first half-year performance for Canadian retailers ever, which makes the data good enough to support another rate hike from the Bank of Canada this year. Oil prices also rebounded slightly and most importantly, Canadian yields edged higher. So while USD/CAD bounced off its post-data lows, we firmly believe that it is poised to test and probably break 1.25. With no data on the calendar, the Australian and New Zealand dollars retreated against the greenback. Lower gold and Iron ore fines 62% Fe CFR Futures prices contributed to the move but that’s primarily a function of the U.S. dollar’s rally.

Sterling dropped to a 7-week low against the U.S. dollar.
Public sector finances and net borrowing were significantly weaker than expected but it was U.S. dollar strength that took the pair lower. Sterling had been under pressure since the Bank of England’s monetary policy announcement and the latest round of U.S. dollar strength was the straw that broke the camel’s back. Between the central bank’s ongoing concerns about Brexit, uneven data and the prospect of a stronger U.S. dollar, we would not be surprised to see GBP/USD drop to 1.2700, especially now that it broke below the 100-day SMA.

4 Reasons Why Euro Took A Hit
 

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4 Reasons Why Euro Took A Hit

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