- EUR/USD bounces hard on tariff noise and a combo’ of negative inputs to a post-Fed Dollar story today.
- EUR/USD rallies +0.60% on the day, over 0.20% of that was on a Trump tweet.
EUR/USD has been supported, finally, at the doldrums of the 1.10 handle. In most recent trade, the news that Trump is imposing addition tariffs has dented US yields and the dollar even further. The Dollar had already given up its pursuit of the 99 handle and had stumbled back below the 38.2% Fibo retracements of the entire Federal Reserve event move prior to the tariff story. It has now sunk further and well below the 50% Fibo retracement and is now en route for a test all the way back to the 61.8% Fibo which is located around 98.40 – that’s over a 0.55% drop for the start of the month so far.
A combination of lower US yields, profit-taking on the Dollar, and the US ISM data miss also threw some extra cold water on the Buck, (although will hardly be a surprise to the cautionary Fed’ members). The ISM manufacturing index dropped to 51.2 from 51.7 and was somewhat weaker than expected. “The details, however, gives hope for a stabilization in the near term,” analysts at Nordea argued:
“The drop was almost in full explained by a drop in both the production index and the employment index. The more forward-looking new orders index was actually slightly up, and the new orders minus inventories series give hopes for a stabilisation in the near term. Export orders continued down, however, and is now just below 50. Global weakness and uncertainty around trade was an important reason for Fed’s rate cut yesterday. In sum, therefore, today’s numbers will not persuade the FOMC to think different about monetary policy going forward.”
At the same time, markets the US administration is also unlikely to still on the strength of the Dollar considering its soft Dollar policy and this too will weigh on the sentiment surrounding the Dollar going forward. President Trump was quick to criticise the Fed’s decision yesterday, although failed on first attempts to make any direct impact o the market or price of the Dollar. It should be expected, however, to be a major theme going forward all the while that trade disputes between the US, EU and China go on unresolved and currencies wars could be the next trade to come into vogue.
EUR/USD can’t rally much further on EZ macro fundamentals
Meanwhile, as for the euro, when looking to the European Central Bank, the latest flurry of EZ data will be important for them, especially given how fragile the economy is. Yesterday’s downside 0.1% miss in core CPI and the ECB’s focus on underlying inflation and inflation expectations will solidify the case clearer for an additional round of stimulus in September. Yesterday’s Q2 GDP data for Spain, Italy and the Eurozone, as well as July inflation for France, Italy, and the Eurozone was all rather underwhelming. The EZ’s GDP came in line with consensus at 0.2% q/q although though headline CPI met expectations at 1.1% y/y. The services sector is about the only prop to the economy and EUR/USD is not going to be able to find much traction on Dollar weakness alone.
EUR/USD levels
Analysts at Commerzbank explained that EUR/USD has broken below 1.1110/06, the April and May lows:
“In doing so has introduced scope to the 1.0974 2018-2019 support line, which in turn guards the 78.6% retracement at 1.0814/78.6% retracement. The market will stay directly offered below 1.1176/81 (mid June low and March low) and only a close above here would signal recovery to the 55 day ma at 1.1235 and the highs from last week at 1.1285. But while capped here it will remain on the defensive.”
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