EUR/USD: Upside Limited To 1.1450 Next Week; Waiting For More Clarity From Fed Yellen
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EUR/USD – NEUTRAL BIAS – (1.1150-1.1450)
The US dollar remains under downward pressure in the near-term driven primarily by the market’s dovish outlook for Fed policy. Even Fed Vice Chair Dudley’s warning that the market is too complacent over the likelihood of further rate hikes has offered little to no support for the US dollar. The market remains unconvinced that the Fed will back up their words with action. The recent diverging performance between the US economy and labour market is adding to uncertainty over the timing of the next Fed rate hike. The Fed is also becoming more pessimistic over the medium to longterm outlook or the US economy viewing current policy settings as less stimulative than previously assumed.
The next key event for the outlook for Fed policy will be the speech on the 26th August from Fed Chair Yellen at Jackson Hole which hopefully will offer more clarity.
Based on traditional yield spread developments, US dollar weakness already appears to be overshooting although it could yet extend further in the near-term. In contrast, the euro has been deriving some support from incoming economic data which has reassuringly revealed that the negative impact from the initial Brexit vote shock is proving more modest than feared. The release of the latest euro-zone PMI surveys for August will be watched closely in the week ahead. The case is not yet compelling that the ECB will ease policy in September.
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