Finally, we are on the last trading day of August. The common currency lost the height this quarter as well on the continued signal that rate differentials continue to support the US dollar. Financial markets have spent the past couple of months forecasting the timing of the tightening.
Bonds:
Early August UST 10-yr rate bottomed around 1.19% and now closed at 1.29%.
Besides, 10Year Germany yields closed at -0.439%, down 30 bps from the recent peak. The Germany 10 Years / United States 10 Years Government Bond spread value is -172.8 bps, as per Worldgovernmentbonds.
On Monday, US 10yields eased slightly to 1.29% vs 1.31% Friday’s closing price. Unsurprisingly, we forecast this move in early 2021. The rise in US 10yields and fall in EURUSD will go hand in hand.
FX:
The common currency posted a peak in early 2021. Since then, the cross has witnessed a significant correction of a little over 5%. On a monthly basis, the EUR lost more than 0.50% against the dollar. As shown on the below chart EUR, outperforms against four crosses but fell against five.
Throughout this quarter and the previous one too, we recommend long EURCHF and change the course of EURUSD since mid-June. Recently added the cross EURGBP in the neutral category from a bearish view.
Looking ahead, we still recommend long EURCHF and dip-buying in EURGBP around 0.8400. Despite the latest 5.5% retracement, we continue to underweight EURUSD.
Macros:
Latest Flash Eurozone PMI data signaled the strongest expansion tagged to the eurozone in August, as per IHS Markit. IHS Markit cited Eurozone leads as US and UK growth wanes, Japan and Australia contract.
Interesting note from the latest release was, growth in the service sector overtook that of manufacturing for the first time in the recovery from the pandemic as COVID-19 containment measures were eased further during the month to the lowest since the start of the pandemic.
Looking ahead, inflation and final GDP estimates for European countries should focus closely. Besides, US payrolls could dominate the EZ zone data. Our key focus remains on EZ GDP estimates.
Tightening:
Most of the market participants including us kept an eye on Powell’s testimony at Jackson Hole. In simple, we understand that the timing is still not clear, but it is imminent. We continue to expect in September meeting Fed to announce the tapering plans. The interesting thing is the gap between tightening and rate rise events is wider than anticipated. Buying dollar dips favor the trend into the end of Q3.
Image source: Bloomberg
TECHNICAL OVERVIEW
EURUSD was rangebound during last week with some positive technical developments. That’s what we forecasted last week. The pair managed to keep the previous week low and is now holding at 1.1650. We expect EURUSD to trade in 1.1650-1.2000 in the days ahead.
Highlights for the August month are 1. EURUSD holds the weekly support zone 1.1650-1.1550. 2. EURGBP traced out a double bottom pattern and was on the verge of another breakout higher. 3. EURCHF is developing a double bottom and a weekly close above 1.0850 would be the game-changer.
We expect EURUSD to find support near 1.1700 while resistance is visible at 1.1900 and 1.2000 marks.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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