EUR/USD: Could Slip Quickly To Test 1.08
EUR/USD Remains Under Pressure Into Weekly Close
Thursday’s Recovery in EUR/USD was short lived with the pair turning lower from a high posted at the North American close. A steady decline shows the pair breaking to fresh lows for the week on Friday. Janet Yellen’s speech triggered little volatility to the pair, and with the European session closed, a close near weekly lows appears probable.
Yellen speech presented a lot of questions related to inflation, providing further evidence that the central bank is not entirely sure what is keeping inflation levels subdued. This has not been the first time a central bank has made such an admission, the Reserve Bank of New Zealand has made similar statements earlier this year, and the Reserve Bank of Australia has come to terms with low inflation, noting that it is a concern globally. The Fed chair’s comments follow similar rhetoric in the September FOMC meeting minutes, released earlier this week. Fed members essentially questioned the Phillips Curve model, stating that inflation levels have shown low responsiveness to the rate of labor utilization.
The communication from the Federal Reserve has not changed the outlook for a rate hike in December, with the futures market floating a probability around 70% for most of the week. It may, however, be viewed that the Fed is level setting markets for future rate hikes, with rhetoric suggesting they may consider letting the economy run hot. A rate hike this year would theoretically put pressure on inflation, and with the Fed’s continuous reminder to the markets of remaining data dependant, there is even more uncertainty in the timing for the path of normalization beyond the next rate increase.
The inflation hurdle is not new to the Fed, Yellen initially
mentioned in the December 2014 FOMC meeting that falling energy prices
were having a transitory effect on inflation. While the PCE price index
has moved higher since, it still falls short of the 2% objective.
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EUR/USD meanwhile, has fallen quickly to 1.10 after breaking support at 1.1130. That may be more of a psychological than technical support, but the break could well open the way to a move to 1.08, which would look like a big move in the context of the recent range.
Relative rates/yields in real or nominal terms, don’t really provide much support for meaningful Euro weakness, and while that won’t prevent a slip towards 1.08, something more fundamental would need to turn up to justify a break of that.
There’s the DBRS review won Portugal’s credit rating (Oct 21) and the Italian referendum on Dec 3 but little on the economic calendar that springs out.