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Euro: What Will Drive It Above 1.15?

Published 01/07/2019, 03:25 PM
Updated 07/09/2023, 06:31 AM

Daily FX Market Roundup Jan 7, 2019

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

Over the past 30 days, nothing has been more influential to currencies than risk appetite and equities. As the first full week of 2019 trade begins, this correlation continues to drive FX flows with the Dow up another 98 points after Friday’s more than 700 point gain. The one thing that we learned from Fed Chair Powell at the start of the month is that despite strong job growth, the central bank is no rush to raise interest rates. But what is good for stocks may not be good for the U.S. dollar because a slower tightening cycle reduces the attractiveness of the greenback. With that being true, USD/JPY shrugged off softer data and extended its gains for the second day in a row. From last week’s releases, we knew that manufacturing activity slowed significantly at the end of the year but service-sector activity should have improved because nonfarm payroll growth was very strong. Unfortunately that was not the case as the ISM non-manufacturing index dropped to a 5-month low of 57.6. This report will make the data-dependent Fed even more cautious about tightening and encourage further V-shaped recoveries in high-beta currencies.

The best-performing currency on Monday was the euro, which has its eye on 1.15 versus the dollar. Having consolidated in a 200-pip range for a large part of the past 2 months, the pair is prime for a breakout. Monday’s strength is particularly remarkable given renewed protests in France and Hungary. Not only does this unrest raise political and social concerns, it also inhibits the recovery in France and could restrain growth for the Eurozone as a whole. Euro traders were pleased to see the sharp recovery in German and Eurozone retail sales but the manufacturing sector continues to struggle with factory orders falling a steep 1% in November, against a forecast of -0.1%. Tuesday's industrial production and Eurozone confidence numbers could hurt more than help the currency but what matters the most is risk appetite. If stocks continue to recover, EUR/USD could shrug off these reports and make a clean break above 1.15.

Meanwhile, no one should find the underperformance of sterling surprising. The next 2 weeks is critical for not only Brexit negotiations but the economy and the currency. Parliament begins its debate on Prime Minister May’s Brexit deal Thursday and the vote will be held next week. If she doesn’t win the support that she needs, Britain will leave the EU on March 29 with no deal – a scenario that could drive sterling down 25% according to Bank of England Governor Carney. We suspect that he’ll be sharing concerns about the consequences of a no-deal Brexit in his online Q&A this Wednesday. There are a handful of UK economic reports scheduled for release this week, but none of it will be as important as Brexit.

All 3 of the commodity currencies traded higher on Monday with the Canadian dollar leading the gains. In the past 4 trading days, USD/CAD has fallen from a high of 1.3665 to a low of 1.3279. On Monday, the combination of rising oil prices, a stronger IVEY PMI report and risk appetite took the pair to its lowest level in nearly a month. This nearly 4-cent-move close to completing the reversal that we had been looking for in USD/CAD (the target in our 2019 forecast was 1.32) came because we expect the Bank of Canada to note that the risks to growth have shifted from the upside to the downside so future moves will be data dependent.

Unlike Canada, Australian manufacturing activity contracted for the first time in more than 2 years in December. The PMI manufacturing index dropped to 49.5 from 51.3, its lowest level since September 2016. This did not bode well for Monday night’s trade balance report and Tuesday's service-sector activity report but none of that matters to AUD/USD, which closed above its 20-day SMA for the first time in a month. China-US trade talks are particularly important for Australia and New Zealand and judging from the rise in stocks on Monday, investors are optimistic.

Latest comments

Happy New Year to all.The EURUSD wil fall to 1:1,because the eurozone has no future.Its foundations are crumbling.I mean...look whats happening and you will understand what I mean.People are fed up with austerity and this leads to protests against the incompetent eurozone governments who bend their knee to speculators and bankers.People need real jobs and you get real jobs in the real economy not in the bubble economy speculators and bankers have created.Yes populism is the answer to destroy the forces of globalization.
I think you don't know what you are talking about. Bubble and Europe? Real jobs...we don't buy the jobs like the US is doing via tax cuts for the companies. We are simply deleveraging and this needs to be done to get down from the massive credits. The US doing the opposite and that is considered no real jobs. People aren't fed up with austerity in most EU countries, ppl are fed up from inequality.....thats not the same!. And all governments are working for the corporations and banks, that is how it is everywhere. And populism is the cry for help of an imbalanced society and major problems of a country.....thats not healthy, but after all believe what you like.....I guess you have to learn a lot and sadly you are not at the right place to do it here on investing!
Hello Kathy.Your analysis are so easy to absorb and straight to the point. Always eager to gobble up what you put out.Wishing you a most prosperous 2019, Kathy.
Your analysis one of my favourite... Please update us time to time...
can possible to touch 14100 today?
thank you...
Why didnt shes mention US-Sino trade war or the shut down. These are leading factors for the greenback sliping
What enthusiasm is there for Euros/Eurozone in general? ECB failed, growth is non-existent, inflation is years away, and populism is taking over. Fed will hike in March as wage growth and inflation will force their hand, and ECB will delay rate rises until early 2020 (although they won't be able to raise them then either). EUR/USD below $1.08 by May and below $1.00 (yes, below $1.00) by early 2020.
Yes and the result is being USD becoming a bubble and the US government unable to manage interest payments! EU is deleveraging nicely and you are overleveraging more and more until you collapse into oblivion. Euro being weak makes imports for the US attractive and that put pressure on your economy. With all benefits come side effects. Your debt will go on go up and ours (Germany) will go down. Have fun with seeing your credit-worthiness go down the drain.....you once were a big lender of money....these days you are one of the biggest debtor nation there is. Great success....student loans sky rocketing, pension funds in trouble, bond market suppressed and debt not anymore manageable. But hey at least USD exchange rates are high! :D
And what would the effects of US government shutdown on all these matters ma’am?
I see eur/usd to fall to 1.1170 from current levels.
Some solid industrial production numbers should bring more buyers
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