Week in FX Europe – Euro Market Woes to Cap the EUR

The 18-member single unit has its work cut out if there is any hope to gain sustainable traction. There are a plethora of negatives currently impeding the EUR’s rise in the short term despite the modest miss in Friday’s nonfarm payrolls (NFP) headline print that has the dollar closing out the week on the back foot. General European underperformance, coupled with real money focused on diminishing or reversing their European asset flows, will weigh on the EUR.

European bourses tumbled for a third consecutive session Friday, mostly on the back of a lackluster European earnings season and concerns that the Federal Reserve might raise rates sooner-than-expected. No surprise to see the DAX being one of the hardest hit, losing -2.1% on the day. With Germany being Europe’s backbone, investors are obviously concerned what impact the European Union and U.S. Russian sanctions will have on that nation’s growth, given the strong trade and energy links with Russia. Throw in Argentina’s debt default, and the financial woes of Portugal’s Banco Espirito Santo debacle, and there are enough reasons to rattle investors hard.

Many in the market have taken the opportunity to try and fade the EUR’s rise on the back of Friday’s modest miss in the NFP headline print. EUR short positions were sitting comfortably ahead of the report; however the release would seem to justify the Fed’s current stance in indicating ongoing labor market slack, and to maintain its current interest rate policy.

To the neutral, the July jobs report is neither strong nor weak enough to shift currency investors’ expectations on the timing of the Fed’s first-rate hike. Focusing on the stronger U.S. fundamentals would favor the USD outperforming the EUR, and has the EUR bear initiating or hoping to add to their short positions in this uptick. The expectation is for a bearish resumption through the new 2014 low at €1.3366.

Gold Caught in the Crosshairs

Gold seems to have become decoupled from geopolitical turmoil. The precious metal has only briefly profited from safe-haven flows, failing to trade north of the psychological $1,300 per ounce handle in light of such events as the Russia-Ukraine conflict, the downing of the Malaysian Air jetliner, and the ongoing hostilities in the Gaza Strip.

With global inflation a non-starter, the precious metal is not even required as an inflation hedge. Demand is waning (Indian imports have fallen -77%, year-to-date), and the asset’s price seems to only want to go one way: down. Another obvious obstacle to the precious metal is a strengthening U.S. dollar.

Despite the Federal Open Market Commitee’s policy outlook remaining in place for now, a changing U.S. economic outlook should eventually weigh on gold prices in a more meaningful way as the market gives way to a less dovish Fed policy that leads to U.S. rates backing and supporting the dollar. The key will be the developments in the U.S. labor market — it will be the Fed’s primary focus going forward in regarding to rate-hike timing.

What to Expect Next Week

Jobs data (Australia, New Zealand, and Canada) and central bank rate announcements from the Reserve Bank of Australia (RBA), European Central Bank (ECB), and the Bank of England (BoE) continue to dominate the fundamental landscape.

The RBA will kick-start the rate announcements off next Tuesday. The market does not expect any change, but the “long” carry-trade investors are wary of Governor Glenn Stevens’ constant efforts to jawbone the AUD lower. Higher rates in the U.S. will eventually put this trade under more pressure, and on an outright basis, the AUD is battling it out with the USD at its two-month lows (AUD$0.9280).

Expect another unchanged monetary policy announcement from the BoE when its two-day Monetary Policy Committee meeting concludes next Thursday. For the U.K., its key economic data release should be July’s service sector purchasing managers’ index on Tuesday.

The ECB is expected to remain on hold with rates and other policy action at its August 7 meeting. President Mario Draghi is likely to emphasize the long-term refinancing operation that will start in September, and the completion of the bank’s asset-quality review in October. In respect to inflation, he is likely to downplay the Eurozone’s recent drop to +0.4% in July from +0.5% in June, while highlighting lower energy prices and higher core inflation.

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