Confusing trading week for the currencies

Euro rallied today. What is the forecast for the currency? 

The Euro consolidated gains on Wednesday, trading near a one-month high. A higher-than-expected inflation reading boosted bond yields. As a result, investors were pressured to cover their bearish bets on the common currency.

According to the new data published on Tuesday, eurozone inflation soared by 3% year-on-year in August. That is the highest increase in a decade. The European Central Bank expected only a 2% rise, while some analysts set a 2.7% target. The yields on German benchmark debt skyrocketed to their highest levels since late July due to the reading.

Consequently, the jump in bond yields forced investors to stop their multi-month streak of U.S. currency purchases against the Euro for now. According to the latest positioning data, net short bets against the USD/EUR pair have plummeted down to their lowest levels since March 2020.

Meanwhile, implied volatility gauges on the common currency also surfaced in the market. One-month maturities jumped to their highest levels since early July as investors’ expectations grew that the European Central Bank might signal a policy shift at a meeting next week.

The ECB is in a situation where it may think about reducing emergency bond purchases, – noted Robert Holzmann, the governor of Austria’s central bank. He also added that most likely, the officials will discuss the issue at the meeting.

Despite the hawkish comments and the positive data, the Euro failed to make much progress above the $1.18 level thus far. The common currency traded at $1.1803 in early London trading, remaining below a high of $1.1842 hit on Tuesday following the data.

What do the experts say? 

According to the analysts, the lack of sustained euro strength is due to the current ECB forward guidance. The latter suggests asset purchases will continue until rate hikes become necessary. However, that means the stimulus program might be expanded next year.

Credit Suisse strategists noted that unless eurozone economic data shows consistent upside surprises in the near future, traders won’t get excited about the idea of persistently increasing eurozone rates, or a strong upward trend in EUR/USD pair. So far, they forecast the pair to end the year at near $1.16.

Meanwhile, the U.S. dollar climbed up slightly against its rivals, thanks to a mix of firmer U.S. Treasury yields and weak Asian factory activity data.

The dollar index rose to 92.777 against the six rival currencies on Wednesday, after tumbling down as low as 92.395 on Tuesday for the first time since August 6.

Dollar Uptrend is Over for Now

Despite the marginal increase, the greenback exchanged hands near its lowest point in almost three weeks. Traders are waiting for a key U.S. jobs report, which is due on Friday. They hope to get some clues on when the Federal Reserve might begin paring stimulus.

The greenback edged up by 0.1% against the euro, trading at $1.18015 per euro, after plummeting down to the weakest point since August 5 at $1.1845 in the previous session.

Ray Attrill, the head of foreign exchange strategy at National Australia Bank in Sydney, noted that the Dollar uptrend is over for now at least. Federal Reserve Chair Jerome Powell managed to separate the debate over stimulus taper timing from any decisions about higher interest rates.

He also added that positive price action in the Aussie and Kiwi dollars since their recent lows suggests a formation of a base.


How did the Australian and New Zealand dollars fare? 

The Australian dollar traded flat at $0.73115 after skyrocketing to a more-than-two-week high of $0.7341 on Tuesday. It tumbled down as low as $0.71065 on August 20, though.

New Zealand’s dollar declined by 0.18% to $0.7035 on Wednesday. However, it remained close to its recent high of $0.70685, which reached the previous day. The Kiwi plunged to $0.6807 on August 20, hitting a more-than-nine-month low.

Fed officials are dropping broader hints that a taper isn’t imminent. For instance, Dallas Fed President Robert Kaplan noted that he might reconsider the need for an early start to tapering stimulus if the Covid-19 pandemic harms the economy.

Last Friday, Fed Chair Jerome Powell stated that tapering could begin this year at the Jackson Hole conference. Still, he also declared that the central bank is in no hurry to raise interest rates.

The senior currency strategist at Barclays in Tokyo, Shinichiro Kadota, noted that Powell’s speech didn’t provide any new information. Instead, it left the forex market waiting for nonfarm payrolls this week. Meantime, the dollar remains in the red, lacking any real direction.

Investors are expecting the report to show solid employment growth in August. That should help the agency to further the discussion on tapering and bolster the dollar. The Fed made clear that a labor market recovery is one of the main conditions for tapering.

According to economists’ forecasts, nonfarm payrolls may show an increase of 750,000 in August, after soaring by 943,000 in July. Furthermore, the unemployment rate may show a decline to 5.2% from 5.4%.

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