How low can the euro go? The common currency is at the mercy of King Dollar, which seems benevolent early on Thursday – but that could change quickly.
The greenback is mostly benefiting from the Federal Reserve’s upcoming announcement about tapering its purchase scheme. The prospects of the Fed buying fewer bonds triggered a sale of US debt, resulting in higher yields. The increase of 10-year Treasuries to around 1.50% makes the dollar more attractive.
Earlier in the week, the greenback also rode higher on a “risk-off” mood. However, investors ignored concerns about China’s power outages and the upcoming debt ceiling deadline, resulting in stock market gains. The dollar still advanced.
The greenback has taken a breather on Thursday morning, edging lower against the euro and other currencies. One reason is a report that the US Congress is set to approve government funding through December 3, averting an imminent shutdown.
This agreement is good news, but there are no developments on the debt ceiling – which may result in the US missing debt payments in mid-October. Democratic Party infighting on the expenditure package is in full force as well.
It is also essential to note that EUR/USD’s recovery is minimal – another typical “dead-cat bounce.” Where next?
Germany releases its preliminary Consumer Price Index (CPI) figures for September, and there is good reason to expect elevated inflation. Spain was surprised by reporting an increase of 4% YoY, driven by soaring energy costs. A high German CPI print could push the euro higher.
Fed Chair Jerome Powell is set to testify before a House committee later in the day, making it his third public appearance in as many days. Speaking alongside European Central Bank President Christine Lagarde and others, Powell reiterated his position that inflationary pressures should subside. Up on Capitol Hill, in a less friendly environment, he may face harsher scrutiny and perhaps express more worries about price rises. That would keep the dollar bid.
Final US Gross Domestic Product figures for the second quarter are set to confirm the 6.6% annualized level previously reported. Jobless claims are set to decline from last week’s 351,000 print. These publications are unlikely to derail the Fed’s intention to withdraw support.
Overall, fundamentals remain supportive of the dollar. However, Thursday is the last day of the month and the quarter, which means money managers will be adjusting their portfolios. After gaining substantial ground, the greenback could suffer some selling pressure, especially around 15:00 GMT., the time of the London fix.
However, that would probably be temporary. The fundamental picture remains bearish for euro/dollar – the pair could advance at first but then return down.
Meanwhile, traders remained cautious about the deadline for avoiding a US government shut down on Thursday. The US Senate Leader Schumer remained prepared for the vote on a stopgap bill to keep the government funded through to December 3.
On the other hand, the shared currency remained depressed amid divergence between ECB and US stance on tapering. ECB President Christine Lagarde avoids tighter monetary policy by saying not to overreact to transitory supply shocks. On the economic data side, the Eurozone Consumer Confidence came at -4.0 in September, up from -5.3 in the previous month whereas the Service Sentiment dropped 15.1 in September as compared to 16.8 in August.
As for now, traders are waiting for the German Harmonized Index of Consumer Prices, Unemployment Rate, the Eurozone Unemployment Rate, US Gross Domestic Product (GDP) data to gain fresh trading impetus.
EUR/USD Short (Sell)
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