Treasuries and Wall Street futures are higher, albeit fractionally, after Friday’s rally on Fed Chair Powell’s comments that seemed to take QE tapering off the table in the near term. The 10-year Treasury yield trades at 1.305% with the 2-year at 0.215%. It is a little more of a mixed picture in overseas markets.
ECB’s Villeroy added to signs that the ECB will discuss monthly asset purchase levels at its September meeting. Also, Eurozone ESI economic confidence and the Swiss KOF indicator came in weaker than anticipated, but still pointed to ongoing robust growth, while inflation data for Spain and Germany showed another pick up in annual rates. Core European bourses are firmer with the GER30 0.19% higher.
Inflation lifts in Germany and Spain. The Spanish HICP rate came in higher than anticipated at 3.3% y/y in preliminary readings for August. German data is due during the European PM session, but state data already released also pointed to a slightly higher national CPI rate, which already stood at 3.8% y/y in July. The HICP rate was expected to hit 3.4% y/y, but could come in a tad higher still. Base effects from Germany’s temporary cut to the VAT last year continue to play a role, and we agree with the ECB’s assessment that headline rates will normalise again next year. Still, against the background of sharply higher import prices and ongoing disruptions in global supply chains, there is some risk that the overshoot could prove to be more sticky than officials currently assume. With the ECB set to confirm next week that the economy will hit pre-crisis levels at the end of the year, the data will add to the arguments of the hawkish camp at the ECB and backs expectations that monthly purchase volumes under the PEPP program could be scaled back again to the levels seen in the first quarter of the year.
In the currency market, the US Dollar has remained heavy in the wake of Fed Chair Powell’s refrain from signalling a policy tapering schedule on Friday. Powell, while still acknowledging tapering could be “appropriate” this year, also downplayed the risks of inflation, seemingly pushing back against the increasingly vocal hawks who had been out in force last week. EURUSD edged out a 24-day high at 1.1810.
Friday’s closing of EURUSD, along with the further rally today, is key as the asset closed above the 20-day SMA and flirts once again with the psychological 1.1800 level. If the asset manages to sustain its recent rally along with a breakout of the 23.6% Fib. retracement from May’s downleg, but more precisely the 50-day EMA at 1.1825, then further optimism could be raised. This could lead to 2-month highs. However this is a key challenge for the asset as it coincides with 200-day EMA and 38.2% Fib. level at 1.1907.
Any reversal at this point could resume the downwards channel seen since June, something that looks likely for now, as momentum indicators are abiding by price action. The daily RSI is looking to continue extending higher since early August but still remains close to the 50 barrier implying a ranging market. The MACD holds below neutral zone but signal line and MACD lines are close to it, both suggesting that downside risks have not entirely faded yet.
Longer-term risks remain to the downside for EURUSD, given the favourable expected US growth rate and larger associated fiscal stimulus compared to the Eurozone.
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Andria Pichidi
Market Analyst
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