Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Will Euro Break 1.10?

Published 2015-09-22, 04:37 p/m
Updated 2023-07-09, 06:31 a/m

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Will Euro Break 1.10?

For the next 24 hours, the foreign-exchange market's focus will be on the euro, but before discussing why, it's important to talk about Tuesday’s sharp sell-off in equities and currencies. U.S. stocks closed down more than 1.5% and the deterioration in risk appetite was driven by a number of factors. Most importantly, concerns about the impact of Fed tightening have returned and if the doves (Lockhart and Yellen) are saying that rates could be increased as early as October, then there seriously could be a strong motivation within the central bank to raise rates in 2015. Their decision to delay this month could be just that – a one-to-three month wait for more confirmation. The widespread gains in the U.S. dollar confirm that rate-hike expectations are a big driver of Tuesday’s move in currencies. However investors are also nervous about whether the Federal Reserve is making the best decision for the U.S. economy. According to the Richmond Fed index, manufacturing activity is contracting so far in September. This follows similar slowdowns reported in the NY and Philadelphia regions. Chinese data was scheduled for release Tuesday evening and there were legitimate concerns that the report could shine a light on the ongoing challenges in the world’s second-largest economy. On Monday, Fed President Lockhart said the central-bank’s focus is the domestic economy but as we have seen time and again, the U.S. is not immune to global-market troubles.

It has been a very challenging start of the week for euro and unfortunately trading in the single currency will only become messier as the week progresses. EUR/USD declined for the third straight day, closing in our 1.10 target level. Over the past month there has been an extremely consistent message coming out of the European Central Bank. Policymakers expressed their unified frustration with the region’s fragile recovery, low level of inflation and global market uncertainty. The primary focus this week will Mario Draghi’s hearing in Brussels on Wednesday. It's a quarterly grilling by the European Parliament’s Committee of Economic and Monetary Affairs. If the head of the European Central Bank confirms that they could boost the Quantitative Easing program, EUR/USD could drop to 1.10. Even with the latest decline in the euro, the currency is 3 cents higher than where it was in July and the price of crude is 10% lower. While the euro has fallen sharply, it is still up nearly 3 cents from its July lows and with Tuesday’s decrease, the price of crude is more than 10% lower than 2 months ago, giving the ECB more reasons to be cautious than optimistic.

Eurozone PMIs numbers -- manufacturing, services and Markit composite -- are also scheduled for release and investors are waiting for weaker data to confirm their bearish outlook. Given the concerns of European policymakers and the sharp decline in the outlook component of the ZEW survey, we believe the risk is to the downside for these reports. Technically the level at which the EUR/USD rally failed last week is a significant one. 1.1466 capped gains in the currency pair back in May and again in June and has now marked the top for the currency pair.

The worst-performing currency on Tuesday was the British pound, which fell sharply on the back of weaker public-sector finances. public borrowing hit 12.1 billion in August, the highest level in 3 years. Economists had been looking for improvement but lower tax receipts and higher government spending took their toll. This report highlights the challenges that Chancellor Osborne faces in meeting his deficit reduction targets. Manufacturing activity is also slowing according to the last survey from the Confederation of British Industry. The CBI index dropped at its fastest rate in 2 years. Economists had been looking for the Total Trends index to rise to 0 from -1 but instead it dropped to -7. According to the director of the CBI, “Exports are the missing link in the UK recovery at the moment, with the strong pound squeezing manufacturers’ margin.” Support in GBP/USD is at 1.5330.

The Australian dollar was the day’s second-worst performer. Although consumer confidence increased and house prices rose more than expected, Aussie was hit hard by the decline in copper and gold prices. The rising dollar and worries about demand from China drove copper prices to a 3-week low. Tuesday night’s Caixin Chinese manufacturing PMI index will determine whether the commodity currencies will see further losses. If manufacturing activity slows, AUD/USD could drop below 70 cents and NZD/USD could test 62 cents.

The Canadian dollar continues to trade lower ahead of Wednesday’s retail sales report. Economists are looking for the improvement in the labor market to drive stronger spending but stagnant wholesale sales growth raises the risk of a downside surprise. The gains in the U.S. dollar also drove oil prices lower, adding pressure on the loonie. In addition to retail sales, we have oil inventory data due on Wednesday.

Japanese markets were closed on Tuesday but that did not stop the yen from trading higher against all of the major currencies including the U.S. dollar. The losses in USD/JPY confirm that the primary theme of Tuesday’s trade was risk aversion. However the yen's strength will only make life more difficult in Japan. With the stimulative impact of Abenomics beginning to fade, the recovery is slowing. Tuesday night’s PMI manufacturing index is expected to show a slowdown in manufacturing activity while thursday’s consumer price report could show core inflation turning negative for the first time in 2.5 years. Combine that with the recent downgrade by S&P and we can see the yen losing its luster.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.