FX Market s’ Predisposition To Buy EUR/USD
Market Movers Today
In the euro area, the most important data release today is money supply and private sector bank lending. In June, lending to households and non-financial corporations continued their upward t rend, meaning t he ECB’s accommodative monetary policy is feeding through to the private sect or. This should eventually generate higher inflation but t he ECB’s is being challenged current ly by a stronger euro, which is a strong headwind to inflation.
US core capital goods orders are due for release and consensus is for another modest increase. Over the past months, the figure has disappointed, implying that fixed investments growth did not look like a strong contributor to GDP growth in Q2. As private consumption is also growing at a slower pace than anticipated, this paints a more modest picture for GDP growth than we had expected.
In scandi markets, we will get the release of the Norwegian LFS and Swedish unemployment rates together with the Swedish Economic Tendency Survey and household lending. Otherwise, focus will remain on Swedish politics.
Selected Market News
As expected, the Fed kept interest rates unchanged yesterday, leaving all eyes on the statement. Overall, our interpretation of the statement was that it was a little dovish even if we did not get that much new information apart from two phrases. The first was on the process of unwinding the balance sheet , which may st art ‘relatively soon’ instead of ‘this year’, which in fact is not new as it reflects the choice of words Fed Chair Janet Yellen used during the press conference in June. More significantly, the Fed stated t hat inflation is now running ‘below’ 2% (before ‘somewhat below’), which supported FX market s’ predisposition to buy EUR/USD, sending the cross above the multi-year top from 2015. Overall, we think the Fed statement supports our call that the Fed will make an announcement on quantitative tightening at the next meeting in September and on the back of a strong belief in the Phillips curve, st ill hike rates in December. Importantly, we think risks are skewed towards the Fed pausing its hiking cycle further into 2018. For more information, see our full FOMC review here.
Yesterday’s EIA data showed a larger-than-expected drop in US oil inventories, which aided Brent crude temporarily above USD 51/bbl for the first time since early June. The rebound in the oil price has supported the traditional oil currencies including the NOK. Despite the latest NOK rally, however, we see positioning, technicals and short -term valuation as increasing headwinds. As such, even if we remain medium- to long-term bullish on the NOK, we do see a risk of a temporary setback over the next month.
In Sweden, the four Alliance Parties said they will request a vote of confidence for three of the Red/Green governments SDP ministers (infrastructure, interior and defence) because of their wrong handling of the IT scandal in the Swedish Transport Agency, which has had big implicat ions for possible leaks about national security. The ministers have also been criticised for not giving this information to the Riksdag. Prime Minister Stefan Lövfven has announced a press conference today at 10:00 CET. He basically has four opt ions: (1) to dismiss the three ministers, (2) to dismiss the infrastructure minister but let the other two stay (supported by the Left Party), (3) to announce an elect ion and (4) the government resigns, letting the Riksdag speaker look for a government constellation (could be the same, could be a new). None of these are particularly appealing. Either way, we see no reason for a significant market reaction.
