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Will EUR/USD Break 1.10?

  • Kathy Lien
  • 17 August 2019

 

 

Daily FX Market Roundup August

 

It has been a great week for the US dollar which recovered against all of the major currencies with the exception of sterling, which coasted on stronger UK data.The dollar's rally was driven primarily by better than expected US data. Retail sales doubled expectations while year over year CPI growth edged closer to the central bank's 2% target. These reports validate Fed Chairman Jerome Powell's recent comments about the economy's resilience and his positive assessment of the labor market. What it doesn't do is reduce the chance of easing. Fed fund futures are still pricing in 100% chance of a quarter point rate cut next month so it will be very difficult for dollar bulls to remain in control. So far we haven't heard many Federal Reserve officials say that a rate cut is coming. Typically when the Fed's guidance is misaligned with market expectations, they become more vocal and in this case, they could be holding off until Jackson Hole.

 

The Jackson Hole summit would be the perfect venue for the Federal Reserve to set or reset market expectations.A number of Fed officials will be speaking including Chairman Powell on Friday. When we last heard from the central bank, they made little mention of the need for further easing but given all of the developments since July, their language could/should change. If they are committed to lowering interest rates in September, we should hear central bankers downplay the improvement in spending and retail sales. Some may even overtly press the case for easing which would be very negative for USD/JPY and USD/CHF. However if they emphasize the uptick in data, the dollar could soar on the notion that they may delay a rate cut.

 

The worst performing currency was the euro, which sold off 4 out of the last 5 trading days against the US dollar.Economic data has been mostly weaker with the economy contracting in the second quarter, investor sentiment (as measured by the German ZEW survey) hitting its lowest level since 2010 and industrial production falling by the steepest amount since November 2019. Eurozone PMIs are scheduled for release and there's a very good chance that these numbers will come in softer, building the case for EUR/USD to break 1.10. However, euro found support at the end of last week from one very important headline about the German government preparing to boost government spending if the economy falls into recession. The German economy grew in only one of the past 4 quarters, so recession is certainly in the realm of possibility. Fiscal stimulus would help a lot but it may be months before the German government announces any new spending measures. The ECB will ease before then and how the euro trades will depend on the extent of their stimulus.

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.