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Sentiment on risk in Asia was lowered by a larger than expected decline in Japanese exports. This reignited concerns on the health of the global economy. In line with the US, Asian equities show moderate losses. However, EUR/USD remains very resilient and is still holding within striking distance of yesterdays top. So, for now, the euro’s ‘outperformance ‘compared to the developments in other markets persists.
The eco calendar is again thin along with volume. It is Triple V time:
vacation, volume and volatility.
In Europe there is no important data expected.
The Germans bond auction will probably have no lasting impact on EUR/USD trading.
In the US, existing homes sales will create some headlines, but we doubt that they will have a lasting impact on EUR/USD trading. There will also be some headlines/comments on the meeting between EU’s Juncker and Samaras. This will bring the Greek issue again in the spotlights, but we don’t expect this event to bring a big progress. It could be a slightly negative for sentiment on the single currency. The item with the biggest market moving potential is scheduled after close of the European markets.
The marquee event is the release of the FOMC minutes and all eyes will be focused on the same event. If there are moves in the FX market they will be in response to the minutes. Investors will look for clues on the Fed policy from the minutes of the August 1 policy meeting. However, it won’t be that easy to draw firm conclusions from the internal debate at that meeting.
At the time of the meeting, the Fed was probably close to further policy stimulation. So, the tone of the minutes will be soft, but the eco data in August were better than in the previous months. Therefore, the Fed might have a good reason to adapt its view on the recent eco data. In this context, the reaction of the dollar and on other markets will probably tell more about the market sentiment than about the content of the minutes. In this context, it is not easy to draw any firm conclusions for bonds or the dollar. Looking at yesterday’s price action, the impression is that the market has still some unwinding of euro short/dollar long positions to do. The Fed minutes should not provide much reason to reverse this move.
However, before that, the global market sentiment might already have changed to tone for EUR/USD trading.
Another question is how long the rally of hope on ECB action can persist without concrete news.
The EUR/USD touched a new 2012 low at 1.2043 on July 24. At the end of July and in August, EUR/USD rebounded from the year low after the comments from ECB’s Draghi that the ECB would do whatever is needed to preserve the single currency. The pair reached a corrective top at 1.2444 and settled in a tight sideways range between 1.2242 and 1.2444. From a euro point of view, markets were waiting for the details/conditions to allow the ECB and/or the EFSF/ESM to take action in the peripheral bond markets. It can still take several weeks for this issue to be resolved. From a dollar point of view, markets are pondering the chances for further Fed easing. Until yesterday, both factors were in balance, keeping EUR/USD on a sideways trajectory. Keep in mind traders deal in the here and now, if the ECB doesn't keep them pumped up they will change course and the herd will follow. Keep a close eye for hints of a change in the winds.