Between the ECB’s views on the currency, the terrorist attack in Spain and arrests in Finland, EUR/USD should be trading below 1.17. The tragedy in Barcelona is a harsh reminder of the ongoing geopolitical risks facing the region. From an economic perspective, these attacks increase allocations to anti-terrorism efforts, discourage tourism and deter consumers from frequenting restaurants and other establishments. So far we haven’t seen a major impact but if they continue, we could. The only reason for the euro’s resilience is U.S. dollar weakness but if risk aversion exacerbates, we could see a more material decline in the currency. The most significant developments this past week in the Eurozone aside from Barcelona were the ECB’s comments on the currency. After a 13% rally in EUR/USD year to date, the central bank is finally expressing concerns over the currency’s gains. In the account of their last monetary policy meeting, they worried about the risk of the euro overshooting and the impact that it would have on inflation. They saw conclusive evidence of inflation pick up lacking but also attributed part of the euro’s gains to improving conditions in the Eurozone economy. There’s no question that the economy is doing better with the trade surplus rising to 22.3B from 19.0B but the longer the euro remains elevated, the greater strain it puts on external demand and economic data.
ECB President Mario Draghi will be speaking at Jackson Hole next week and it is unclear whether he will use this platform to prepare the market for tapering. Some analysts believe he plans reserve the big announcement for his home turf but with only 2 weeks between Jackson Hole and the ECB meeting, suggesting that they could reduce asset purchases would give investors more time to discount the move. Eurozone data will also be focus with August PMIs, the German ZEW survey and IFO reports scheduled for release. Looking ahead, we continue to look for EUR/USD to break
ECB President Mario Draghi will be speaking at Jackson Hole next week and it is unclear whether he will use this platform to prepare the market for tapering. Some analysts believe he plans reserve the big announcement for his home turf but with only 2 weeks between Jackson Hole and the ECB meeting, suggesting that they could reduce asset purchases would give investors more time to discount the move. Eurozone data will also be focus with August PMIs, the German ZEW survey and IFO reports scheduled for release. Looking ahead, we continue to look for EUR/USD to break