Euro to Dollar: 20-year Lows Near 0.9911 Beckon

Euro to Dollar: 20-year Lows Near 0.9911 Beckon
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By James Skinner |

The Euro to Dollar exchange rate entered the new week back down near to the parity milestone and would be at risk of slipping to a new two decade low around the 0.9911 level if U.S. bond yields and the greenback look to extrapolate last week’s recovery through the days ahead.

Europe’s single currency benefited briefly after European Central Bank executive board member Isabel Schnabel appeared to suggest last week that a second 0.50% increase in the ECB’s interest rates should not be ruled out for September but its relief from selling pressure was only momentary.

The Euro was quick to unravel back toward parity during the latter half of last week after Wednesday remarks from a series of Federal Reserve reopened the market discussion about whether the Fed could opt for a third 0.75% increase in U.S. interest rates at the next meeting in September.

“EUR has been extremely range-bound, but we don’t think this will last. There has been a significant clean out of EUR shorts since parity was reached, governments are starting to share higher energy costs with consumers, and firms will have to start slowly curtailing production, while supply lines are being hit by a lack of transport options on the lower water levels on the river Rhine,” says Jordan Rochester, a G10 currency strategist at Nomura.

“The market could also start to price in a softer landing in the US, with PMIs next week in focus — if we get a bounce back, like we saw in the Philadelphia Fed survey it could keep EUR under pressure too,” Rochester wrote in a Friday research briefing after reiterating a forecast for EUR/USD to fall back to 0.9750 by the end of September.

The Euro had been to recover previously lost ground in July after some U.S. economic figures suggested the economy could be near to recession while other data suggested inflation pressures may have moderated in recent months, leading to speculation about a possible slowdown in the pace at which the Fed is likely to lift its interest rate in the year ahead.

But U.S. employment figures and other data made a mockery of fears for the health of the economy earlier this month while some members of the Fed’s rate setting committee continued to give short shrift last week to the notion of a slowdown in the pace of policy normalisation up ahead, leading to simultaneous recoveries in U.S. bond yields and the Dollar.

“EUR/USD can trade most of the week below parity. Gazprom will shut its mainline pipeline to deliver gas to Western Europe for three days from 31 August to 2 September. The shutdown may reignite fears that a permanent cut-off will occur. The Eurozone PMIs are likely to bring recession risks to front of mind (Tuesday),” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

The Euro to Dollar rate will be sensitive this week to the message and implications of the latest S&P Global PMI surveys of the manufacturing and services sectors on Tuesday and especially if they show any signs of expectations for the European economies having reached a bottom.

Thursday’s minutes from the July European Central Bank meeting will also likely be poured over too, although much about the outlook for the Euro will depend on the Dollar’s response to economic figures due out from the U.S. ahead of Friday’s remarks from Fed officials.

“We are maintaining our short EUR/USD trade idea, established last week. Natural gas prices have advanced further this week which is ensuring a high level of uncertainty over the growth outlook persists,” says Lee Hardman, a currency analyst at MUFG.

“For the US dollar generally, the rebound this week is consistent with our view and we suspect there is more to go. It is much too early for the Fed to pivot and comments from Fed officials this week after the CPI data suggests a concerted efforts to dampen down the speculation of the Fed’s job being nearly done due to just one good CPI print,” Hardman said on Friday while reiterating a forecast for EUR/USD to fall to 0.99 in the weeks ahead.

The Dollar could benefit at the expense of the Euro if Fed Chairman Jerome Powell leads markets to price-in higher levels of U.S. interest rates for September and beyond at the annual Jackson Hole Symposium on Friday.

Meanwhile, this Friday’s reading of the Core PCE Price Index for July is also likely to be watched closely and could support the single currency if there is anything in it to corroborate the signs of moderation seen in the most recent official measures of U.S. inflation.

“EUR/USD remains very heavy and could sink below parity at any time. Adding to the sell-off may well be the portfolio adjustments of Asian central banks. Asian FX remains under heavy pressure and will prompt intervention to sell dollars and support local currencies. Asian FX reserve managers will then need to sell EUR/USD to re-balance FX portfolios,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

“We also wonder whether we will see a more hawkish ECB this week. The market prices a 54bp rate hike for the September 8th meeting. Could the ECB start to discuss prospects of more aggressive rate increases if it wants to offer EUR/USD some support? Watch out for any speeches from the hawks in northern Europe this week,” Turner and colleagues also said on Monday.

Source: Poundsterlinglive

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