Quarterly Outlook
Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
Global Head of Investment Strategy
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Euro getting crushed here, could be more to come.
John J. Hardy
Global Head of Macro Strategy
Summary: The downdraft in the euro and European stocks suggest that global investors are second guessing their heavy reallocations into Europe after the EU caved to the Trump agenda in striking the trade deal at the weekend. The euro risks further broad weakness.
Euro getting crushed as the air comes out of the geopolitical narrative from earlier this year. Chart: EURJPY
The euro sell-off yesterday turned into an out-and-out rout, as EURUSD was crushed back toward the lows of the range all in one go and EURJPY viciously rejected the latest rally extension as discussed in the chart below. Again, the sudden weakness is due to the EU cowing quickly to the Trump administration terms, a move that is angering national political leadership in France and Germany and elsewhere. This will have very interesting longer-term implications for politics on the national and EU level across Europe and nothing in the Trump era is permanent. For now, the ugly sell-off in European stocks yesterday combined with the euro downdraft speaks loudest. For the short-term this looks like a wakeup call as investors overbought the narrative that Europe would more boldly move ahead with a more domestic-oriented agenda to move away from the reliance on the US for security and economic growth through exports. The EURUSD area of note is 1.1500-1.1450 more than the range low of 1.1557 which has already been tested this morning, with the area toward 1.1200 (the prior approximate range high) at risk of opening up if the downside momentum stays intense here.
The extension higher in EURJPY on Friday was the last gasp for now for this EURJPY rally, as the rally was very smartly rejected yesterday on broad euro weakness, with further follow-through overnight. There is enormous room for a deep consolidation here without fully erasing the prior rally move, with a move below perhaps 165.00 needed to suggest that we are in a very long-term topping process and have been since 2024, which remains my technical base case despite this intense recent rally from below 162.00.
Today we get the useless US June JOLTS survey (very low response rate, heavy revisions) and the Conference Board US Consumer Confidence survey, which is a bit more interesting for the national mood. The important Expectations component of that survey settled in June near the lows of the range since 2013 after a one-off wipeout in April around Trump’s Liberation Day announcements that reversed in May. The Present Situation component of the confidence survey is in a local downtrend but still relatively elevated in the historic range. The market may be jolted on the JOLTS survey as it was last month on the sudden strength after a string of weaker numbers, but it is a mere distraction ahead of the July US ADP payrolls number tomorrow (which in turn was very misleading last month relative to the strong-ish Nonfarm Payrolls change and 0.2% drop in the Unemployment Rate). The NFP change number has been beyond misleading and yet market participants (and algorithms?) continue to react strongly to it… The most recent QECW (an exhaustive survey that comes out with a significant delay relative to the monthly BLS employment data) showed that 2024 payrolls saw the largest overestimation in 15 years
And I’m not alone in fretting about the quality of US data. A recent Reuters article discusses the poor quality of US economic data, in part due to Trump administration disruptions to the data-collecting bureaucracy.
Note as well that we have the June and Q2 CPI figures up from Australia tonight, a key input ahead of the August 12 RBA meeting (more than 90% priced for a 25-bp cut). As I discussed in my Friday week-ahead piece, I see the Bank of Japan as far more likely to deliver a surprise than the FOMC.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
With the hard reversal, the trend readings for the Euro are reversing about as hard as I have ever seen on the FX Board (-3.2 on the two-day momentum and the day is young….). The US dollar and Japanese yen look somewhat like fellow travelers here, just as they were against the euro when the latter was strong.
Table: NEW FX Board Trend Scoreboard for individual pairs.
The weak USD trends are falling like flies, with USDCAD set to flip positive today if the rally holds, and EURUSD will likely flip negative tomorrow on hold below the range lows. Note EURAUD set to flip to negative today as well if the price action holds.
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