Mid-Day Report: Euro Mildly Higher Against Dollar, But Stays Soft in Crosses

Euro recovers mildly against dollar today. Some people attributed that to comments from German finance minister Schaeuble. However, it should be noted that the common currency has indeed weakened against Sterling and Yen today. The recovery in EUR/USD should be more related to retreat in the greenback. In particular, dollar dipped quite sharply against commodity currencies today. With lack of economic data from US, we’d expect dollar’s retreat to continue in US session.

German finance minister Schaeuble said today that ECB Draghi was “overinterpreted” by the markets. He referred to the comments from Draghi that “over the month of August financial markets have indicated that inflation expectations exhibited significant declines at all horizons” and ECB “stands ready to adjust our policy stance further”. Several investment banks have adjusted this week their forecasts of ECB’s QE timeline. Deutsche Bank forecasts that the ECB would introduce ‘private’ QE in September, compared with previous forecast that any QE program would begin early next year. Nomura now expects the ECB to cut the main refi rate and the deposit rate by -10 bps in either September or October. It noted that there is now a 30% chance of QE this year, up from previous estimate of 25%.

In our special report, we argued that ECB Draghi’s speech at Jackson Hole may not signal a change in ECB’s decision making. The president comments over worsening inflation expected were his improvisation. Therefore, his views may not be widely shared by other members. Moreover, the first auction of TLTROs announced in June would begin in September while the work on ABS purchases remains in progress. We believe the former would help the hawks support postponing further actions while the latter would be the first action to be taken if the ECB needs to act further. More in Dovish Draghi Does Not Mean ECB Would Act Further In September.

German Gfk consumer sentiment dropped to 8.6 in September versus expectation of 8.9. Gfk noted that “the escalation of the situation in Iraq, Israel and eastern Ukraine as well as the gradually accelerating spiral of sanctions in Russia have now also had a negative impact on the previously extremely optimistic economic outlook of Germans.” And, “if domestic framework conditions also deteriorate decisively as a result of any potential further escalation, it is probable that more difficult times will also lie ahead for the German economy.”

Daily Pivots: (S1) 1.6521; (P) 1.6558; (R1) 1.6576; More

GBP/USD’s consolidations from 1.6534 continues today with another recovery. Further rise could be seen. But upside is expected to be limited by 1.6737 resistance and bring fall resumption. The decline from 1.7190 medium term top is expected to extend lower. Below 1.6534 will target 1.6251 cluster support (38.2% retracement of 1.4813 to 1.7190 at 1.6282).

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidations to long term down trend from 2.1161. The current development, with medium term top formed at 1.7190, argues that such consolidation is possibly completed, just below 50% retracement from 2.1161 to 1.3503 at 1.7332. Focus now turns to 55 weeks EMA (now at 1.6506). Sustained trading there will pave the way for 1.4813 key support and below.

GBP/USD 4 Hours Chart

GBP/USD Daily Chart

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