Euro Hammered as ECB’s Concerned with Currency Strength, Dollar Outshone by Canadian Dollar

Sharp pull back in Euro and strong rebound in the Dollar are the main themes in the forex markets today. The common currency is weighed down by reports that "unnamed" ECB officials are concerned with its strength. And ECB might opt to "muddle" through the September meeting instead of announcing some solid tapering plan. That’s more that offset the supposed positive boost from stronger than expected Eurozone CPI. On the other hand, Dollar continues to regain grounds as supported by positive economic data. Nonetheless, Canadian Dollar is indeed the strongest one today as lifted by stronger than expected GDP growth. New Zealand Dollar stays the weakest but Sterling catching up as another round of Brexit negotiation is concluded without any progress.

Released in US session, personal income rose 0.4% in July versus expectation of 0.3%. Personal spending rose 0.3% versus expectation of 0.4%. Headline PCE deflator was unchanged at 1.4%, in line with consensus. PCE core slowed 0.1% yoy to 1.4% yoy, meeting expectation. Initial jobless claims rose 1k to 236k in the week ended August 26, slightly below expectation of 237k. Continuing claims dropped -12k to 1.94m in the week ended August 19. From Canada, GDP rose 0.3% mom in June,, much higher than expectation of 0.1%.

ECB concerned with Euro strength, may muddle-through September meeting

Euro receives no support from stronger than expected inflation data released today. Instead, the common currency is weighed down by reports that ECB officials are very concerned with the appreciation in exchanged rated. ECB President Mario Draghi promised to discuss QE in Autumn. And markets have been expecting the central bank to announce some sort of tapering of its EUR 60b per month asset purchase program.

However, Reuters quoted an "unnamed" source saying that "the exchange rate has become a bigger issue." And "it is now less favorable for an exit and a stronger argument for a muddle-through option." Another unnamed source was quoted "the huge appreciation in the euro is already causing monetary tightening and is equivalent to an increase in interest rates." However, a third source was quoted saying that "you can’t have it both ways – a strong economy and at the same time a weak currency… You should also not call it euro ‘strength’ but rather ‘non-weakness’."

Eurozone CPI rose to 1.5% yoy in August, up from 1.3% yoy, beat expectation of 1.4% yoy. Core CPI was unchanged at 1.2% yoy, in line with consensus. Germany unemployment dropped -5k in August, unemployment rate was unchanged at 5.7%.

No decisive progress in Brexit negotiation

EU chief Brexit negotiator Michel Barnier expressed his frustration as the third round of negotiation with UK concludes today. Barnier said there has been "no decisive progress" on key issues even though there had been some "fruitful" discussions. And the negotiations are still "quite far" away from making significant progress to move on to trade agreements. And he complained there are issues of "trust" between the parties. And, he is "impatient… I am not angry… I am impatient and determined."

On the other hand, UK Brexit Secretary David Davis said there were "some concrete progress". And there were "long and detailed discussions across multiple areas". Davis reiterated that "it’s only through flexibility and imagination that we will achieve a deal that works truly for both sides.

BoE Saunders: Brexit risks don’t justify keeping rate low

BoE MPC member Michael Saunders, a known hawk, said that Brexit risks are not enough to justify keeping interest rate at record low. He acknowledged that "Brexit process might be bumpy, and could undermine business and consumer confidence." But he emphasized that "we should not maintain an overly loose stance as insurance against this scenario. Rather, we should be prepared to respond as needed if it happens." He used an analogy that "we do not need to be putting the brakes on so much that the economy weakens sharply." But, "our foot no longer needs to be quite so firmly on the accelerator in my view." And he urged that "a modest rise in rates would help ensure a sustainable return of inflation to target over time. Saunders have been voting for a 25bps with fellow MPC member Ian McCafferty since June.

Japan PM Abe urged "transparency and predictability" in Brexit negotiation

In Japan, Prime Minister Shinzo Abe attended a Japan-UK business forum in Tokyo today, alongside UK Prime Minister Theresa May. Abe sounded diplomatic and said he’s convinced that UK will remain a "compelling" place for Japanese businesses. But he stressed that Brexit has to be "successful for UK, EU and global economy:" Abe also urged "transparency and predictability" regarding Brexit negotiations to "minimize any damage on businesses." May said that "we will also seek to ensure the freest and most frictionless trade possible between the UK and the EU, and this includes the imperative of a smooth and orderly transition for people and businesses, in the UK and in Japan."

BoJ Masai: "Momentum towards achieving the target is strengthening"

BoJ board member Takako Masai  said that there is still "some distance" to achieve the 2% inflation target. And there are "geopolitical risks" that could "trigger market turmoil and hurt sentiment". But she noted that "recent data has shown some encouraging signs" And "momentum towards achieving the target is strengthening." Steady rise in household income and tightening job markets will eventually boost domestic demand and push inflation up to target. BoJ has repeatedly pushed back the timing for hitting the 2% inflation target. And now, the central bank projected it will be achieved by March 2020. Masai said that the delay was "unfortunate" and emphasized that it’s important to "pursue policy to lay the groundwork for achieving 2 percent inflation."

ANZ business confidence points to broad based economic expansion

New Zealand ANZ business confidence dropped to 18.3 in August, down from 19.4. That is, a net 18.3% of firms surveyed expect general business condition to improve over the coming year. ANZ bank chief economist Cameron Bagrie said that theses are "healthy readings for confidence, activity expectation, investment and employment across all sectors and regions". And, there is a broad-based economic expansion in operation".

RBNZ governor Graeme Wheeler said yesterday that "a lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth." And, "the appreciation in the exchange rate has been a headwind for the tradables sector and, by reducing already weak tradables inflation, made it more difficult to reach the Bank’s inflation goals."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1847; (P) 1.1915 (R1) 1.1950; More…

EUR/USD’s pull back from 1.2069 extends to as low as 1.1822 so far today but it’s staying well above 1.1661 support. That is, near term outlook remains bullish as further rise is still expected. Above 1.1928 minor resistance will turn intraday bias back to the upside for retesting 1.2069 high first. Decisive break there will resume whole up trend from 1.0339. This will remain the preferred case as long as 1.1661 holds. However, firm break of 1.1661 will confirm short term topping and bring deeper pull back.

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. For now, medium term outlook will remain bullish as long as 1.1295 support holds, in case of pull back.

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