EUR: Many Negatives in the Price Already?

Asia last morning:

The beginning of the week in Asia marked a promising and positive start for risk-related activities. The statements made by Fed Chair Jerome Powell during the Jackson Hole Symposium were of considerable significance. His assurance that the Federal Reserve would exercise caution and prudence in its deliberations regarding potential interest rate hikes managed to alleviate the apprehensions of investors. Previously, there had been concerns about his hawkish stance on inflation and the potential necessity to maintain higher interest rates for an extended period.

Furthermore, notable developments took place in China as well. Authorities in China decided to take significant steps to bolster the equity market. One noteworthy action was the decision to reduce the stamp duty on equity trading by fifty percent. Additionally, there was an announcement of a deliberate slowing down of the pace at which Initial Public Offerings (IPOs) would be introduced. These policy adjustments had a positive impact on Mainland stocks, injecting them with renewed momentum. This move echoed a similar instance from the past when a reduction in stamp duty back in 2008 contributed to a substantial stock market rally.

As now, the market indicators were portraying an encouraging picture. S&P 500 futures and most Asian markets were experiencing upward movements, often referred to as "trading in the green." The US Dollar (USD), although demonstrating a weaker performance against most of the other G10 currencies, did not follow the same trend in relation to the Japanese Yen (JPY). The JPY, in this context, was impacted by the prevailing risk-on sentiment in the trading environment, compounded by higher short-term yields of US Treasury bonds.

Among the various currencies, the Australian Dollar (AUD) took the lead in terms of gains against the USD. This surge in the AUD's strength was attributable to multiple factors. One of the contributing factors was the supportive measures undertaken by Chinese authorities to reinforce the equity market within their country. Additionally, robust retail sales data originating from Australia also played a role in bolstering the AUD's performance against the USD. This combination of favourable circumstances resulted in a notable appreciation of the Australian Dollar in currency markets.

EUR: many negatives in the price of already?

In the month of August, the EUR/USD currency pair has found itself among the casualties of the resurgent USD. In addition to the overarching movements of the USD across the spectrum of currencies, a consistent stream of negative news related to the Euro (EUR) has contributed to this trend. Notably, economic data from the Eurozone has continued to deteriorate, amplifying concerns about the trajectory of the region's largest economy, Germany, which is experiencing a rapid decline. This deterioration has prompted investors to reevaluate their expectations regarding future interest rate hikes by the European Central Bank (ECB). Consequently, the prevailing sentiment no longer anticipates any further rate hikes at the current juncture.

This evolving scenario has exacerbated the erosion of the EUR's previously held advantage in terms of interest rate differentials. Consequently, the headwinds facing the EUR have intensified on a global scale. However, it's worth noting that despite these challenges, there is a belief that a significant portion of the negative factors impacting the EUR's value have already been factored into its current price.

In this context, there exists a potential for a "hawkish skip" in September—a scenario where the ECB holds the current rates steady but commits to a more assertive tightening of monetary policy in the future. This possibility adds an element of uncertainty to the market outlook. Furthermore, an analysis of short-term fair value trends indicates that the current trading level of EUR/USD is lower than what would be expected considering factors such as the EUR-USD rate spread and other key foreign exchange drivers.

Turning to upcoming events, one of the pivotal focal points for EUR investors will be the impending release of the Eurozone's flash Harmonized Index of Consumer Prices (HICP) inflation estimate for August, scheduled for Thursday. Anticipations ahead of this release indicate that the headline inflation figure might slow down to a lesser extent than initially anticipated, while core inflation is projected to remain relatively stable compared to its reading in July. Such an outcome could underscore the ECB's commitment to addressing inflation concerns, even if it involves enduring some economic costs associated with monetary tightening. Positive inflation data might foster expectations of a more hawkish stance by the ECB in the coming months, potentially benefiting the EUR.

In the immediate term, market attention is also directed towards other pertinent events, including the latest Eurozone M3 monetary aggregate data and speeches by key figures within the ECB such as Joachim Nagel, Pablo Hernandez de Cos, and Robert Holzmann. These speeches and data releases will likely contribute to shaping the near-term market sentiment and could provide further insights into the direction of the EUR/USD exchange rate.

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