Euro Weakens as ECB Shows Concerns Over its Strength, Dollar Recovers as Markets Reassess Fed Minutes

Euro trades broadly lower today as ECB monetary policy meeting accounts show that policy makers are concerned with the currency’s strength. Meanwhile, Dollar regains much ground against most currencies. Markets reassessed FOMC minutes released yesterday as saw them not as dovish as initially perceive. Overall, the forex markets are mixed with Aussie and Yen trading as the strongest ones at the same time. In other markets, Gold is staying firm above 1290 but lacks follow through buying for a take on 1300 handle yet. WTI crude oil is extending recent decline to as low as 46.46 so far.

ECB accounts show concerns on Euro strength

The accounts of July 19-20 ECB policy meeting showed that officials are concerned with Euro’s strength. ECB noted that "while it was remarked that the appreciation of the euro to date could be seen in part as reflecting changes in relative fundamentals in the euro area vis-a-vis the rest of the world, concerns were expressed about the risk of the exchange-rate overshooting in the future." Meanwhile, the account also showed that "the point was made that, looking ahead, the Governing Council needed to gain more policy space and flexibility to to adjust policy and the degree of monetary policy accommodation, if and when needed, in either direction."

At the same time, policy makers also discussed making "incremental" changes to the central bank’s forward guidance. And the account noted that "postponing an adjustment for too long could give rise to a misalignment between the Governing Council’s communication and its assessment of the state of the economy, which could trigger more pronounced volatility in financial markets when communication eventually had to shift." Besides, the accounts noted the removal of political uncertainly in Eurozone and markets expectations over US interest rates. And, "these two factors were now largely priced out, leaving the euro back around the levels prevailing before the UK referendum."

Released in Eurozone, CPI was finalized at 1.3% yoy in July, core CPI at 1.2% yoy. Eurozone trade surplus widened to EUR 22.3b in June. Also from Europe, UK retail sales rose less than expected by 0.3% mom in July.

FOMC minutes show worries on inflation

The price actions in US dollar and Treasuries suggested that the market views the July FOMC minutes as a dovish one. The minutes revealed that policymakers were concerned that US inflation might stay below 2% longer than previously anticipated. However, the minutes were not as dovish as anticipated. Despite the disappointment in June inflation, most members continued to maintain the view that the current weak price levels were transitory, although some were worried that inflation might take longer than previously expected to reach the 2% target. Indeed, headline inflation improved modestly, while core inflation steadied, in July. These should be a relief for the members. Barring any dramatic deterioration the economic outlook, we continue to expect one more rate hike in December and a formal announcement of balance sheet reduction to come in September. More in FOMC Minutes Not As Dovish As Seen By The Market

US initial jobless claims dropped -12k to 232k in the week ended August 12, below expectation of 240k. That’s the lowest level since February and second lowest since 2009. Continuing claims dropped -3k to 1.95m in the week ended August 5. Industrial production rose 0.2% in July while capacity utilization was unchanged at 76.7%.

Elsewhere

Japan trade surplus widened to JPY 0.34T in July. Australia employment grew 27.9k in July, above expectation of 20.0k. Australia unemployment rate was unchanged at 5.6%. New Zealand PPI inputs rose 1.4% qoq in Q2 while PPI outputs rose 1.3% qoq.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1705; (P) 1.1741 (R1) 1.1803; More…

EUR/USD’s correction fall from 1.1908 resumed after brief recovery. But intraday bias stays neutral for the moment. While deeper pull back could be seen, downside should be contained by 38.2% retracement of 1.1119 to 1.1908 at 1.1606 to bring rebound. On the upside, break of 1.1908 will extend recent up trend to 1.2042 long term support turned resistance next.

In the bigger picture, an important bottom was formed at 1.0339 on bullish convergence condition in weekly MACD. Sustained trading above 55 month EMA (now at 1.1768) will pave the way to key fibonacci level at 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. While rise from 1.0339 is strong, there is no confirmation that it’s developing into a long term up trend yet. Hence, we’ll be cautious on strong resistance from 1.2516 to limit upside. But for now, medium term outlook will remain bullish as long as 1.1295 support holds, in case of pull back.

Economic Indicators Update