EURUSD - Where the near-term balance of risk in resides

EURUSD has worked well within the bearish regression channel (I’ve just used two standard deviations of the line of best fit) drawn from the Feb highs. We saw an intraday break of that channel on 10 and 11 Aug, with price immediately finding supply off the May swing low - with the ensuing move taking price through the rising trend or what appears looks like a bear flag, again a continuation pattern.

We find support into the 61.8% fibo of the 0.9952 to 1.0364 rally at 1.0211 – this coincides with the consolidation lows seen on 27 July – So a break here would give me confidence that we’re due to revisit parity. Momentum indicators (on the daily) suggest the skew of probabilities suggest moves to the downside, although the options market gives us limited insight here with EURUSD 1-week ‘skew’ trading at a -0.97. Essentially, this prices put option implied volatility at a slight premium to call volatility, meaning the market on balance says if we are to see a move it would be more powerful to the downside. 

We are seeing US 10yr real rates (10yr Treasury adjusted for expected inflation) sitting at a 172bp (or 1.72%) premium vs German real rates, and that is supporting the USD. We also see EU Nat Gas prices trading EUR225 and while we did see that off the highs of EUR251 yesterday, if this keeps making higher highs then the EUR will suffer – especially in an environment where the ECB is widely expected to hike by 50bp in its 8 Sept meeting – it’s almost as though we need to become watchers of the water levels in the Rhine to see how EU NG prices fare as if we see a new one-way trend in NG prices and the EUR should attract sellers.

EU 5y5y swaps (tradeable inflation expectations) are holding up well at 2.07% and while US 5yr inflation swaps sit at 2.49%, both are moving in lockstep – should a trend develop and one moves higher or lower vs the other, then it will impact the exchange rate. For now, while both are holding in its suggest both central banks will look to hike further, but from a relative economic sense the US is in far better shape – this suggests downside risk in EURUSD.

Near-term, in the session ahead we get US retail sales, although we’d need a beat beat/miss to move the dial too intently. Looking forward, the key risks and the marquee dates for trading EURUSD are:

• Jackson Hole Forum 25-27 August – see the event run sheet here - https://www.kansascityfed.org/research/jackson-hole-economic-symposium/macroeconomic-policy-in-an-uneven-economy/
• 2 Sept - ISM manufacturing & US payrolls
• 8 Sept - ECB meeting
• 13 Sept - US CPI
• 21 Sept – FOMC meeting