The EURUSD bounce on the surprising 50 bp rate hike from the ECB proved to be short-lived indicating that investors probably prefer to focus on fundamentals, other than the rate differential with the Fed. The pair erased gains made after the ECB meeting and moved lower on Friday, finding some support at 1.015 level. Judging by the BTP-Bund spread (key benchmark of credit risk on the EU government bond market), the new tool for preventing excessive rise of borrowing costs for troubled EU economies, announced by the ECB on Thursday, failed to soothe the concerns of investors. US markets closed higher; S&P 500 closed a few pips off the 4000 level. Nasdaq rose 1.5% yesterday along with long-dated Treasuries as their yield to maturity decreased sharply by 25 bp, from 3.07% to 2.82%.
The Philadelphia Fed manufacturing index and initial jobless claims released yesterday indicated some weakness in the US economy, which could have contributed to increased demand in the Treasury market and, consequently, lower yields. Initial jobless claims rose for the third week in a row and are now at an 8-month high:
The Philadelphia Fed’s manufacturing index also fell short of expectations, dropping from -3.3 to -12 points, with a forecast of 0 points.
The EURUSD reaction after the ECB meeting and subsequent price action on Friday show that the interest rate differential with the Fed plays a secondary role in determining medium-term movements of the pair. What really drives the pair is geopolitical risks and data points, clarifying how far the growth forecasts for the Eurozone and the US economies diverge. Increased sensitivity of EURUSD to such data releases has been confirmed today after the release of a batch of PMI data from S&P global on EU and Germany services and manufacturing sectors. EU-wide indices for both services and manufacturing sectors fell more than expected but remained above neutral 50 points, while activity in the German economy contracted compared to June:
After the release of gloomy data, the EURUSD moved lower from 1.02 to 1.0150, finding fresh equilibrium there:
The pair is expected to revisit recent multi-year lows next week as there is non-zero chance of the Fed raising the rate by 100 bp next week. The room for hawkish surprises is large so a EURUSD rise above 1.025 is under a big question mark.
Retail sales in the UK in July were marginally better than expected. Excluding fuel, retail sales even managed to rise by 0.4% MoM, against the forecast of -0.4%.
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Written by Arthur Idiatulin
Arthur is a stock market and currency expert with a vast experience in market research and investment consulting. Dedicated Forex trader and financial practitioner, keen on testing new trading techniques and investment strategies.
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