Currency Briefing: Will the euro finally decline?

on Sep 12, 2013

Is the brief fall of the EUR/USD into the area of 1.3100 forgotten? Probably yes, with the main reasons being the weak and far from convincing U.S. labor market data released on Friday, the forthcoming Congressional vote on a U.S. military strike against Syria, as well as persisting doubts about ECB forward guidance.

With regards to the ECB communication strategy, one thing should be reiterated: the ECB’s forward guidance has not led so far to a sustainable fall in rate expectations. In fact the implied market expectations of the 3-month EONIA in 9 months and the 9×12 FRA based on EONIA, have mounted since the announcement of forward guidance. In other words, the EUR positive rate environment is one of the main vehicles supporting the current EUR/USD strength.

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Something interesting to mention: Since last Thursday ECB forward guidance has become even more curious because at the press conference ECB President Mario Draghi referred to the Bank of International Settlement (BIS) and its study according to which the ECB strategy “scored very well” as regards the reduction of volatility and uncertainty. However, such a paper has not been published so far, making the reference a puzzling one. Such alleged assessments, should they exist at all, are not making the ECB`s forward guidance more effective, according to analysts from Commerzbank.

Yesterday the dollar fell across the board after the U.S. President said his administration should support a Russian plan to take away Syria`s chemical weapons reserve that would put U.S. military strikes on hold. Investors were almost immediately enticed out of the dollar into risk-on assets.
The dollar continued to come under pressure amid ongoing concerns as to whether or not the Federal Reserve will announce at its policy meeting next week plans to begin tapering its monthly $85 billion asset-purchasing program. EUR/USD not only retained a bid tone during the whole day, but succeeded in overcoming the resistance in the area of 1.3280 (50 per cent retracement of the market`s August-September down move and the tenkan line on the Ichimoku analysis).

Looking at the economic calendar today, the ECB will publish its monthly report (09:00 BST). The report contains a detailed analysis of the prevailing economic situation and the risks to price stability. The ECB monthly bulletin released in August revealed the ECB was content with a gradual recovery in the euro area for the rest of year 2013 and continuing into 2014. The bulletin revealed the ECB was expecting inflation to remain below the 2 per cent target for the medium term, allowing the central bank to continue its monetary easing policy to empower ongoing growth.

ECB President Mario Draghi will speak at a policy discussion at the Euro Conference organized by Latvijas Banka in Riga, Latvia, followed by a press conference. The full text from the policy discussion will be made available on the ECB`s website after delivery, whereas no text will be made available from the press conference.
Additionally, the U.K. Treasury Committee has been appointed by the House of Commons to examine the expenditures, administration and policy of HM Treasury, HM Revenue and Customs, and associated public bodies, including the Bank of England and the Financial Services Authority. The inflation report hearings are scheduled for 10:00 BST.
A list of data is also to be released from the U.S. with Import and Export price indices (13:30 BST) and August Budget statement at 19:00 BST.



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