Is there any stopping the euro? The single currency continued its march higher on Tuesday as it breached key levels against the dollar and pound. EURUSD broke $1.20, the strongest since January 2015, while EURGBP rose to 0.93 to build on its 8-year high. Meanwhile the North Korean missile launch has jolted markets into risk-off mood with havens finding strong bid and equities sold. Dollar bearishness is the big theme that has pervaded the market throughout the summer and there is nothing yet to alter this.
US Treasury yields have sunk on renewed geopolitical worries stemming from North Korea and the dollar is down as Treasuries rally on safe haven demand. At just over 2.1%, US ten-year notes are trading where they were just after Donald Trump’s election in November. Increasingly the euro is seen as a safer harbour than the buck and with North Korea tensions impacting demand for the dollar, the euro is benefitting.
North Korea aside, this is about building macro pressures as euro area growth firms and looks increasingly sustainable while questions are being raised about US growth.
Momentum has been building for the euro for some time but since Jackson Hole and Hurricane Harvey traders have extra reason to be bearish on the dollar.
Bets on another rate hike by the Fed this year are diminishing. Janet Yellen offered nothing on monetary policy in Jackson Hole and that, all else being equal, was regarded as a pretty dovish signal in as much as it betrayed renewed caution about the path of inflation. Traders read between the lines that this makes a third rate hike this year a lot less likely.
Meanwhile Draghi continued to offer an upbeat assessment of the recovery and in avoiding any mention on euro strength being a problem effectively gave the nod to the bulls to push EUR higher.
Hurricane Harvey is a drag for the dollar as markets worry it will dent GDP in Q3 and could be enough to temper any calls for another hike. It remains to be seen what the damage is to GDP but if past experience is anything to go on it will not be as significant as perhaps some of these moves indicate and any dollar selling off the back of this may be overdone.
And in the background are the machinations in Washington - the prospect of a debt ceiling breach in the US and possible government shutdown all weighing on demand for the dollar. Trump’s failure to get anything through Congress on tax is another big drag for the time being.
With all this in mind the data this week is vital. Eurozone inflation figures, US PCE inflation, US nonfarm payrolls and the second Q2 GDP estimate for US growth will drive price action in EURUSD.
A firmer euro is a headache for Draghi. While the exchange rate is not a policy target, it does hit inflation and could slow the pace of tapering. But Draghi will need to wait to the ECB meeting on September 7th for a chance to talk the euro lower.
Euro strength/dollar weakness is also bad news for European companies and this is hitting equities with the DAX shedding close to 2%. It’s a bloodbath for the FTSE 100 too with just Fresnillo (LON:FRES) and Randgold (LON:RRS) registering meaningful gains.
The FTSE 100 is now looking vulnerable to further weakness as it flirts with its 200-day moving average, having sunk below the 50-day last week. With the quiet summer period coming to an end this could be the start of some renewed volatility.
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