Understanding the euro’s recent rise

Giles Coghlan LLB, Lth, MA Financial Source

EUR/USD and EUR/GBP upside bias

Broad dollar weakness has been supporting the EURUSD rise lately. The EURUSD can be known as the ‘anti-euro’ index due to its strong EUR component of the Dollar Index. As a result, they have a strong negative correlation. When the Dollar Index falls the EURUSD rises and vice versa. However, it is not only Dollar weakness that is supporting the EURUSD pair. The Bloomberg EUR index is also up around 2.5% this month and up about 8% since February’s low.

What other factors are supporting the Euro?

The passing of the €750 billion European Recovery Fund has been a very positive sign on European solidarity to weather a storm. The so-called ‘frugal four’ did not object enough to block the fund’s passing in the end. This means that the chances of the eurozone now breaking up are seen as being reduced as the nations pull together to support the economy. This has boosted sentiment for the eurozone as a whole and supports the Euro.

Secondly, yesterday German IFO data rose across all three subcomponents giving the euro more reasons to rally. This only adds to the strong July PMI readings from last week and is at least some indication of a potential ‘V’ shaped recovery.

One risk area for the EURUSD this week is due to the US federal CARES Act. This Act has provided huge support to the households impacted by joblessness by extending unemployment insurance benefits by 13 weeks. Furthermore, it has a large payment of an extra US$600 per week to all 31.8 million unemployed. However, the scheme ends in July. So, the issue is that there is a need for more stimulus before month-end, which may prove easier said than done to finalise. This is called a ‘fiscal cliff edge’. At the end of the month, the fiscal supports dramatically ends.

Options markets

In the options markets that is a strong call option skew on EURUSD options, so more EUR strength is anticipated by the market going forward. The majority of these options are ‘call’ (buy side) options which means the options market is positioning for more EURUS strength ahead.

EUR/GBP upside bias

The UK, on the other hand, is still struggling with Brexit negotiations. The EU had out in a date for a summit of EU leaders on October 15 to approve any agreement, with the possibility to move it later in the month if needed. However, they warned that further delays would jeopardise the ratification process ahead of a vote in the European Parliament in December.

As a result, expect EURGBP buyers medium term as long as this situation remains the same.

Learn more about HYCM

Author

Giles Coghlan LLB, Lth, MA

Financial Source

Giles is the chief market analyst for Financial Source. His goal is to help you find simple, high-conviction fundamental trade opportunities. He has regular media presentations being featured in National and International Press.

GBP/USD revisits 1.3530; Dollar pushes harder

GBP/USD adds to the weekly correction and recedes toward the 1.3530 zone on Friday. Indeed, Cable faces increasing selling pressure on the back of extra gains in the Greenback, particularly fuelled by Chair Warsh’s speech at the Jackson Hole Symposium and the US NFP Annual Revision (-79K).

EUR/USD breaches below 1.1600, multi-day lows

EUR/USD now accelerates its decline and retreats to seven-day troughs in the sub-1.1600 region at the end of the week. The pair’s pullback comes on the back of the strong rebound in the US Dollar after Chair Warsh delivered a hawkish message in Jackson Hole, while the US NFP Annual Revision came in at -79K.

Gold challenges its 200-day SMA near $4,530

Gold’s decline gathers fresh steam, hitting weekly lows while disputing its critical 200-day SMA near $4,530 per troy ounce. The yellow metal’s increasing weakness comes in response to the generalised upbeat tone in the US Dollar and the widespread rebound in US Treasury yields, as investors continue to reprice a Fed rate hike in September.

Crypto Today: Bitcoin, Ethereum, XRP rally loses steam despite steady ETF inflows

Bitcoin is back below $80,000 at the time of writing on Friday, after a second attempt at breaking resistance between $81,000 and $82,000. Meanwhile, Ethereum and Ripple mirror Bitcoin’s cooling trend, with ETH sliding to $2,500 and XRP falling toward $1.40 support.

Week ahead – RBNZ and BoC decide on rates ahead of all-important US NFP

Dollar rebounds ahead of ISM PMI and NFP data. RBNZ is expected to raise rates; focus to fall on forward guidance. BoC is set to remain on hold; will it raise rates in 2027?

Diesel’s record $100 warning: The oil shock hiding in plain sight

The Oil market may look calmer than it did a few months ago, but diesel is sending a very different message. The US diesel crack spread, the premium of ultra-low sulphur diesel futures over WTI, recently surged above $100 per barrel for the first time, reaching an intraday record of just over $102.00.