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What Economic Momentum Will The US Bring To Q3?

Published 09/22/2014, 09:47 AM
Updated 06/07/2021, 10:55 AM

Over the weekend, comments from US Treasury Secretary (Jack Lew) advising EU countries to do more to “boost demand” and “resolve differences internally” made financial news headlines and seem to have followed a similar tone to ECB President, Mario Draghi’s recent calls for further “structural reforms” to boost the EU economic recovery. Such hypothetical changes are likely to take time and require lengthy discussions between appropriate EU leaders. In the meantime, the upcoming week is heavy with EU economic data and I continue to hold a bearish bias towards the EUR/USD.

In the early hours of Tuesday morning, the finalized French GDP figure for Q2 is released. It is already expected that French GDP stagnated in Q2 and unless there is an unexpected French economic contraction, I am not expecting much market noise here.

Following French GDP, the latest German Markit Manufacturing PMI and Markit Manufacturing PMI for the Eurozone are released. Both should be deemed high risk, but I will be keeping a closer eye on the latter. Now the EUR/USD has depreciated from those dizzy highs around the 1.40 area, investors are going to decipher whether the weaker EUR/USD exchange rate is helping EU competiveness. If there are no signs of this occurring, calls will probably elevate for even further stimulus from the ECB.

On Wednesday, attention will be directed towards the German IFO data. There is pressure on the IFO, because last week’s disappointing ZEW survey dashed hopes following improved German Factory Orders and Trade Balance that German economic data was returning to consistency. If the IFO data suggests that the German economy is continuing to go through an unexpected rough patch, we should assume this will have bearish implications on the Euro.

The week concludes with one or two ECB speeches which has the potential to cause fluctuations to the EU currency, but we are also expecting French and Italian Business Confidence and Italian retail sales to be released. French and Italian business confidence will be useful to gain an understanding as to what momentum these economies are bringing to Q3, while Italian Retail Sales can obviously have inflation implications.

Like mentioned above, I continue to withhold a mid/long term bearish bias on the EUR/USD. Over the last week or so, the pair found resistance between 1.2958 and 1.2994 on half a dozen occasions and this suggests to me any bull runs towards 1.30 are both capped, and limited at present. Back in August, Mario Draghi’s comments that the “fundamentals for a weaker Euro exchange rate are better now than a few months ago” has stuck with me and as long as EU economic releases continue to further weaken the EU sentiment, I see the potential for the EUR/USD to conclude the month at the low 1.27’s.

Now that the Scottish referendum is out of the way, the other obvious pair to keep an eye out for is the EURGBP. As long as escalations of political unrest within Scotland over the weekend come to a conclusion, investor attraction to the GBP should return fairly soon. The Bank of England (BoE) has finally disclosed a likely timeframe for a rate rise (spring 2015) which is something it refused to do in August and was a major contributor towards the GBPUSD downfall. The divergence of monetary policy between the BoE and ECB remains clear and as long as the BoE moves towards tightening policy and weak EU data continues to raise fears over the ECB loosening policy, the EURGBP is on track to move towards the July 2012 low, 0.7755.

United States

The upcoming week is also busy with economic announcements from the United States, where investors will be looking for further clues towards what economic momentum the US economy is bringing to Q3. The US manufacturing sector expanding at its fastest rate since March 2011 has certainly raised optimism, while the recent retail sales should be considered as robust. Pressure will now be on this Thursday’s Durable Goods to raise hopes for an impressive GDP Q3 figure around October time. However, before Thursday’s Durable Goods, there are two scheduled Federal Reserve speeches where policy members will most likely continue to be asked for queues in regards to when the Federal Reserve will raise rates.

Although Janet Yellen and the Federal Reserve are currently all about the labor markets when it comes to discussing potential rate hikes, I feel there will be a time in the future when the Federal Reserve shifts stance somewhat and begins to indicate it is also looking at how “much slack” there is within the US economy, before raising rates. This is a term the BoE has frequently used, and it would not surprise if the Fed adopt this term as well fairly soon.

Last week, the Federal Reserve finally confirmed that Quantitative Easing (QE) will be concluding in October and although no hints are being dropped as to when a US rate rise will occur, the Fed are moving closer to normalizing monetary policy. As long upcoming economic releases from the US show the world’s largest economy is displaying consistency, I will remain bullish on the Greenback until QE concludes. It also appears that Gold is on track to continue its gradual decline in the meantime, and appears set to meet the 2013 lows ($1187) by the time QE ends.


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