Main financial assets discussed: Euro (EUR), U.S. dollar (USD), Invesco CurrencyShares Euro Trust (FXE) ETF
Top 3 key points:
1. The relative interest rate differential between the European Central Bank (ECB) and the U.S. Federal Reserve (Fed) has been a key driver of the Euro's strength against the U.S. dollar in the past.
2. The changing tone of the ECB, with President Christine Lagarde being more dovish, and the diverging economic performance between the U.S. and Europe suggest that the Euro may weaken against the U.S. dollar.
3. Speculative positioning in the Euro is at its longest in years, and technical indicators suggest a potential breakdown in the Euro's value.
Recommended actions: **Sell** the Euro or the FXE ETF. Short the Euro directly via FX markets or buy a put spread on the FXE ETF.
The euro fell to a two-month low against the dollar and a 12-month low against the pound after German and eurozone business activity slumped more than expected in August, leading to concerns about the state of the European economy and potential pauses in tightening measures by the European Central Bank, while the dollar rose to a two-month peak amid positive U.S. economic data.
The US Dollar performed well against major currencies, with the British Pound, Euro, and Canadian Dollar underperforming, while the Chinese Yuan and Australian Dollar fared better; the Federal Reserve's indication of a higher terminal rate and potential further borrowing cost increases contributed to the market sentiment, leading to lower US equity markets; upcoming economic data includes consumer confidence, inflation gauges from key European countries, and manufacturing PMI gauges from China.
The US Dollar experienced a significant decline due to weak economic data and increased risk appetite, while the Euro and British Pound strengthened. The Australian Dollar and New Zealand Dollar also performed well, and gold and cryptocurrencies rallied.
German inflation beats forecasts, complicating the ECB's task, while US labor data eases and GDP is revised lower, causing the dollar to weaken and the euro to strengthen.
The euro reached a 15-year high against the yen due to signs of inflation in Europe, while the dollar weakened ahead of economic data that could indicate a softening economy.
The US dollar dropped to a two-week low against the euro and other currencies after data revealed lower than expected private payroll growth in August, leading to speculation that the Federal Reserve will halt interest rate increases.
The outlook for the euro area remains uncertain as economic activity has slowed and indicators suggest weakness ahead, but the labor market remains resilient; a restrictive monetary policy is critical for bringing inflation back to the 2% target in a timely manner, and a data-dependent and robust approach to monetary policy is warranted due to the high level of uncertainty.
Euro zone inflation holds steady in August, but underlying price growth falls, complicating decisions for the European Central Bank as it considers a pause in rate hikes amid a slowdown in economic growth.
Despite the divergence in global economies, the US dollar still remains dominant, holding a record-high share of 46% on SWIFT in July, while the euro's share slipped to a record low.
The euro rose against the dollar and euro zone bond yields fell after US unemployment rate increased, suggesting the Federal Reserve may be done with interest rate hikes.
The U.S. is currently experiencing a prolonged high inflation cycle that is causing significant damage to the purchasing power of the currency, and the recent lower inflation rate is misleading as it ignores the accumulated harm; in order to combat this cycle, the Federal Reserve needs to raise interest rates higher than the inflation rate and reverse its bond purchases.
The U.S. dollar declined due to weaknesses in economic growth, leading to a boost in the performance of gold and U.S. equities, while other global assets experienced mixed price movements throughout the week.
Europe's struggle with inflation and economic growth contrasts with the United States, as the European Central Bank's aggressive tightening risks pushing the euro zone into a downturn, with the manufacturing and services sectors already showing signs of contraction.
Most Latin American currencies fell as the dollar strengthened on robust U.S. economic data, with the Mexican peso leading the declines, while Chile's peso gained after the central bank cut its benchmark interest rate and lowered its economic growth forecast for 2023.
The U.S. dollar's share in global reserves has fallen below 60% for the first time in decades, as other currencies like the Euro, Pound, and Yen are on the rise due to a growing number of countries settling trade in their national currencies, driven by the de-dollarization process initiated by BRICS to end reliance on the U.S. dollar.
The dollar strengthens against the yen and keeps the euro and sterling near three-month lows as investors rely on the resilience of the U.S. economy, while China's onshore yuan hits a 16-year low due to a property slump and weak consumer spending.
The US dollar's strength in the foreign exchange market, along with discussions of de-dollarization, highlights the divergence between the US and other major economies. The Dollar Index is on an eight-week rally, reaching a record high in international payments, while the euro's share has declined to a record low. In the week ahead, the US CPI and the ECB meeting are expected to be major events, with the US showing signs of inflation and weaker demand, and the euro facing challenges amid stagnation and inflation. China's CPI and PPI have shown some improvement, but the focus will be on yuan loans and real sector data. The eurozone's focus will be on the possibility of a rate hike by the ECB and the release of July industrial production figures. Japan's household consumption continues to fall, and the country may experience a contraction in Q3. The UK will release employment data and GDP details, while Canada will see data on existing home sales and the CPI. Australia will release its August employment data, and Mexico's peso positions may continue to adjust due to the winding down of the currency forward hedging facility.
The value of the U.S. dollar has been strengthening against the Euro and the British Pound due to the continuing strength of the U.S. economy and the weakness of the European economies.
The US Dollar performed strongly against major currencies, with the Euro experiencing its 8th consecutive weekly loss and the Chinese Yuan performing poorly, while global market sentiment was negative and stock markets weakened. In the coming week, market focus will be on the US inflation report, UK employment and GDP data, Australian employment data, and the ECB rate decision.
The European Commission has revised down its economic forecast, citing high prices for goods and services as a significant factor, leading to reduced growth projections for the European Union and the eurozone. Germany is expected to experience a downturn, while inflation is projected to exceed the European Central Bank's target. Weak consumption, credit provisions, and natural disasters are also contributing to the loss of momentum in the economy. However, the report highlights the strength of the EU labor market with a low unemployment rate.
The U.S. dollar stabilized as traders await U.S. inflation data, while sterling weakened after the U.K. economy contracted more than expected in July.
The US Dollar underperformed against major currencies last week, crude oil continued to rally, and gold prices were cautiously higher, while upcoming events like central bank rate decisions and the Bank of England rate hike are expected to impact the market.
European markets are pessimistic ahead of central bank meetings, energy prices raise the risk of secondary inflation, and the US dollar is gaining strength, which may negatively impact precious metals and cryptocurrencies.
The BRICS bloc, including countries like India, China, and Russia, is slowly reducing its dependency on the US dollar and using their local currencies for trade, which could potentially weaken the US dollar's position as the dominant global currency.
The Canadian dollar edged lower against the US dollar but still maintained a weekly gain due to higher oil prices and the possibility of more interest rate hikes by the Bank of Canada.
EUR/USD nears September low as market cautious ahead of inflation figures and the US Dollar gains strength, while the Euro temporarily benefits from a better-than-expected German IFO survey.
The US economy's growing debt and slow growth may lead to a "long, slow grind," while regional blocs in Asia and Europe pose a threat to the dollar's status as the global currency.
Despite economic headwinds, including the Federal Reserve's interest rate announcement and increased geopolitical tensions, the U.S. dollar index has increased by 5% over the past two months, as former U.S. Vice President Mike Pence criticizes The Fed and recent economic policies from the Biden administration.
The Euro has recovered from the psychological level of 1.0500 against the US Dollar, supported by USD weakness, but the sustainability of the move is uncertain.
The US Dollar struggles to find demand after losses against major rivals, as data on inflation from the Euro area and the US will be closely watched.
Euro zone annual inflation dropped to its lowest level since October 2021, falling to 4.3% in September, while core inflation decreased to 4.5%, prompting uncertainty over potential rate cuts by the European Central Bank.
The European Central Bank's efforts to curb inflation through interest rate hikes have led to the lowest inflation rate in the euro zone in two years, indicating a potential slowdown in economic growth.
The U.S. economy is experiencing turbulence, as inflation rates rise and U.S. Treasuries lose value, leading to concerns about whether Bitcoin and risk-on assets will be negatively impacted by higher interest rates and a cooling monetary policy.
The sharp decline in inflation in Europe in September raises hopes for relief from high consumer costs, but concerns remain regarding higher oil prices and the ECB's ability to achieve its 2% inflation target.
Europe's economy is facing trouble as interest rates rise and debt servicing costs increase, particularly in the eurozone where the European Central Bank will struggle to provide support due to the constraints of the euro; fiscal deficits and breaches of budget deficit limits persist, with countries like Italy and France openly defying spending cuts, while Germany's reluctance to break from balanced budgets and increase investment spending exacerbates the contracting economy.
The US dollar strengthened on positive US economic news, higher bond yields, and hawkish comments from Federal Reserve officials, while the euro weakened due to dollar strength and hawkish comments from the European Central Bank.
The euro's outlook is worsening due to high oil prices and concerns about Italy's fiscal position, raising the risk of a return to the $1 mark.
The euro zone economy likely contracted last quarter due to decreased demand, rising borrowing costs, and higher prices, with retail sales falling more than expected in August, according to a survey by HCOB's final Composite Purchasing Managers' Index (PMI).
The euro area is experiencing stagnated economic activity and weakening growth, leading the European Central Bank (ECB) to adjust its monetary policy by raising interest rates to combat inflation; however, uncertainties remain regarding the transmission of monetary policy and potential risks to economic growth.
Bitcoin is outperforming the US dollar in terms of beating inflation, as shown by the St. Louis Federal Reserve's comparison of the prices of a dozen eggs in both currencies since January 2021.
The dollar weakened and global equities dipped as investors grappled with U.S. unemployment data suggesting a tight labor market and the Federal Reserve's commitment to higher interest rates, while European stocks rebounded from losses.
The euro's value may fall to parity with the dollar again as US yields rise and concerns about euro-area growth and inflation persist.
