Euro Not Reflecting the China Discount
EURUSD could not break above 1.0835 resistance convincingly. ECB President Lagarde’s Jackson Hole speech has been reflected somewhat in the market pricing with September rate hike probability up to over 40% from 34% earlier. ECB Governing Council member Holzmann was also on the wires yesterday and gave hawkish remarks, saying that the ECB hasn’t defeated inflation and probably needs to raise interest rates again in September.
On the flip side, however, economic indicators in the Eurozone, and especially Germany, are fast deteriorating as was reflected in PMI numbers last week. This means EUR resilience could continue to be tested until the US economy slows more clearly. Also, it is worth considering that EUR has so far not completely reflected the weakness in the Chinese yuan. Given the Eurozone’s greater reliance on China compared to the US, it remains more prone to reflecting the weakness in China’s economy. The Chinese yuan is down 5% YTD while the EUR is still up over 1%, which suggests there may be room to catchup if clouds over China remain. Domestically, August inflation print for the Eurozone will be key this week, but ahead of that, Germany’s GfK Consumer Confidence Survey for September may be on watch today.
Market Takeaway: EURUSD gains may be faded as China and German sentiment remain weak.