EURUSD eyes massive 1.1500 level ahead of EU summit

John Hardy

Head of FX Strategy, Saxo Bank Group

Yesterday saw the market buffeted by fresh headlines from the Trump administration on whether China will be singled out in banning inbound investment in areas considered sensitive for national security. The signals have been conflicting, but it seems that Secretary of Treasury Mnuchin has managed to steer policy away from the most confrontational approach, though the net result may be the same – i.e. that the existing so-called “CFIUS” framework will be updated and mobilised to effectively carry out the same policy. 

After a rather wild swing in risk appetite on trade-policy headlines hitting the wires, yesterday resulted in a risk-off day with the major US stock indices settling back toward their lows and long US yields also drooping to local new lows. Somewhat surprisingly, the USD ended the day stronger across the board and with a flourish of conviction – even in USDJPY, although the JPY was firm in most crosses. The explanation may be down to China allowing the renminbi to sharply devalue over the last couple of weeks, which many are linking to the threat of US trade policy. Regardless of the reason, China is the  economic center of gravity in Asia, and its FX policy makes waves for the entire region. As well, the sharply higher oil prices yesterday are JPY-negative as Japan is so reliant on fuel imports.

The Reserve Bank of New Zealand statement was in line with dovish expectations, though it did manage to trigger a slight further slide in front-end NZ yields, taking the NZD with it. The technical situation in both NZDUSD and AUDNZD looks rather pivotal, as the former looks at multi-year lows and the latter at the 1.0800-50 pivot zone that has set the tone in recent months. The statement maintained the conviction that a two-way policy potential is warranted, citing risks from trade tensions and a recent weak GDP print, while expressing the hope that inflation is likely to come into view over the longer haul.

For the balance of this week, we look forward to political headlines coming out of the European Union council summit, which starts today in Brussels. Late yesterday, Greece’s prime minister Tsipras made a friendly overture on accepting migrants back into Greece from Germany (no doubt in exchange for future political considerations and money to deal with the situation). This could extend German chancellor some leverage in dealing with other nations on the issue and make good with her CSU coalition partner on the issue. The EU has a tall task ahead of it in agreeing on migration policy as the outdated Dublin regulation is not up to task. Sterling seems to be fretting this EU council summit today on the lack of progress in Brexit negotiations – look for signals on that front as well and note that EURGBP is poised at the top of the multi-month range this morning and around the 200-day moving average.


EURUSD has given up its gains within the range after the odd period of not following through lower after the dovish European Central Bank meeting. The 1.1500 area is pivotal in the longer-term perspective and an extension of USD strength here could bring the 1.1200 area into view, as a major 61.8% Fibonacci support comes in just below that level for the entire rally sequence from the sub-1.0400 lows to the 1.2500-plus highs.

Source: Saxo Bank

The G-10 rundown

USD – the US dollar has continued its recent strength and doesn’t appear ready to back down for now, possibly driven on the margin by the shift in China’s exchange rate policy in addition to its safe-haven status.

EUR – the single currency not especially singled out for weakness in this environment as EURCHF has managed to tread water and other euro pairs are elevated. Political headline risks are two-way for Europe over the next couple of days. We watch for EURUSD behaviour if the 1.1500 level is tested.

JPY – normally ideal circumstances for the yen here, and an aggressive extension lower in risk appetite could see the yen finally overtake the greenback here, but Chinese FX policy and sharply higher oil prices are possibly holding the yen back a bit at the moment, though it is still firm in the crosses (GBPJPY ready for a more notable breakdown?).

GBP – sterling looking wobbly here ahead of the EU council summit – formerly seen as having more of a Brexit focus until the recent migration issue has stolen the spotlight. An impression that the UK will continue to be left out in the cold on Brexit could see the currency weakening further here. Note that the BoE’s chief economist Haldane is out speaking today – he changed his vote to a hike and is an influential voice on the MPC.

CHF – not making an impression at the moment, a rather weak performance given the backdrop. Could catch a bid if the EU council summit aggravates EU peripheral spreads or EU existential risk in general on the signs of total lack of solidarity or agreement on key issues. Note USDCHF poking around near parity again.

AUD – the Aussie weakening to new lows and China concerns and the strong USD keep AUDUSD lower in focus for a possible run all the way to 0.7000 or even the multi-year lows below 0.6900 eventually.

CAD – a powerful rally in crude not doing much for CAD, save for in more exotic pairings like AUDCAD (we prefer that one lower, by the way) – we are a bit more neutral on USDCAD relative to other USD pairings, given valuation and the energy rally.

NZD – weak for the good reason that the RBNZ remains dovish. The question at some point is when this is fully priced in, especially versus the Aussie, as australia’s economy is perhaps more sensitive to China concerns, etc. Still, if risk appetite stays weak, NZD could continue its march lower sooner rather than later, and the big range break in NZDUSD is a technical catalyst for more kiwi weakness.

SEK – traders steering clear here due to thin liquidity. Nothing begins to break technically in EURSEK to the upside unless we start running up through 9.50.

NOK – strong oil prices providing only modest support here – EURNOK stuck in a rut on a lack of a narrative (stronger economic potential and strong risk appetite are a better environment for a stronger NOK).

Upcoming Economic Calendar Highlights (all times GMT)

   • EU Summit  Begins today
   • 0700 – Spain Jun. Flash CPI
   • 0730 – Sweden May Retail Sales
   • 0900 – Euro Zone Jun. Confidence Surveys
   • 1200 – Germany Jun. Flash CPI
   • 1200 – Poland Central Bank publishes meeting minutes
   • 1230 – US Weekly Initial Jobless Claims
   • 1330 – UK BoE’s Chief Economist Haldane to Speak
   • 1445 – US Fed’s Bullard (Non-voter) to Speak


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