EUR/USD – BEARISH BIAS – (1.0850-1.1300)
The euro remains under modest downward pressure against the US dollar following the Brexit vote. The negative spill-over impact from the Brexit vote will weigh more heavily on the euro-zone economy than the US economy. The clearest negative spillover impact so far has been a further loss of investor confidence in the health of European banks especially in Italy whose share prices have fallen back to the lows during the peak of the euro-zone sovereign debt crisis.
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The developments are increasing the risk of an unwanted tightening of credit conditions in the euro-zone which would dampen the outlook for growth. The ECB have not yet signalled strongly that they will ease monetary policy further to help offset the impact of the negative shock. Euro-zone finance ministers will meet in the week ahead during which they could discuss the best way forward to help stabilise confidence in the banking sector.
The Brexit vote has improved the relative appeal of the US dollar against European currencies. Broad-based US dollar strength has been more modest than some feared helping to ease downside risks for the US economy. Still market participants remain concerned by slowing growth in the US and do not expect the Fed to resume rate hikes until 2018. However, it would likely take another shockingly weak non-farm payrolls report to materially weaken the US dollar.