· The euro was mired near a two-month low on Thursday before a European Central Bank meeting that could signal monetary easing as growth in the currency zone falters.
Sentiment towards the single currency took a big hit after data on Wednesday showed Germany’s manufacturing sector contracted at the fastest pace in seven years while French business growth unexpectedly slowed, sending European bond yields lower.
The common currency traded at $1.11350 after touching $1.11270, its lowest since May 31.
The euro has fallen 2.0% this month on increased speculation the ECB would join other central banks in easing policy as a trade war between the United States and China weakens the global economy.
· Traders see a 48% probability that European policymakers will lower a key deposit rate by 10 basis points to minus 0.50%, according to interest rate swaps.
If the ECB keeps policy on hold Thursday, economists say President Mario Draghi could flag a rate cut for the next meeting in September.
· The dollar traded at 108.130 yen, near a one-week high of 108.290 yen.
The dollar index, which measures the greenback against six major currencies, stood at 97.725 after touching an eight-week high of 97.810 on Wednesday.
· EUR/USD logs four-day losing streak ahead of ECB
EUR/USD fell for the fourth straight day on Wednesday on the prospect of the European Central Bank (ECB) rate cuts.
The ECB is widely expected to leave policy rates unchanged today, but prepare the ground for cuts in the coming months by removing the tightening bias from its interest rate forward guidance.
UBS expects a 10 basis points (bps) rate cut on 12 September, with a further 10bps to follow on 12 December (or possibly earlier, on 24 October).
Meanwhile, ING believes the recent economic data out of the Eurozone has pushed the ECB closer to the July action (pre-emptive rate cut ahead of the Fed).
As of writing, EUR/USD is trading at 1.1134. The bear flag breakdown on the daily chart indicates the path of least resistance is to the downside and the pair could drop well below 1.11. A bullish reversal would be confirmed if and when the pair rises above 1.1286, invalidating the bearish lower highs setup.
· European Central Bank (ECB) President Mario Draghi didn’t leave any doubt about his institution’s conviction to do “whatever it takes” to counter a fall in inflation expectations when he spoke at the banks annual gathering recently in Sintra, Portugal.
All instruments are on the table and can be deployed. That was the message. The question now is: Will anything happen as early as this week?
Expectations are divided as to whether the ECB wants to pre-empt a policy move by the U.S. Federal Reserve that pushes down the dollar and strengthens the euro as this would hurt euro zone exporters and weigh on inflation further.
Traditional ECB watchers though expect a change in the central bank’s forward guidance at this month’s meeting on Thursday and then potential action on interest rates at its meeting in September.
“In response to the weak growth and still subdued inflation, the ECB will likely adjust its guidance in July and vow to keep rates at ‘present or lower’ rather than just at ‘present’ levels,” said Florian Hense, an economist with Berenberg, in a research note earlier this month.
· A quarter-point Federal Reserve interest rate cut in July is almost a done deal, according to economists in a Reuters poll, who expect another later in the year amid rising economic risks from the ongoing U.S.-China trade war.
Over 95% of 111 economists now predict a 25 basis point cut at the July 30-31 meeting. Only two economists polled expected a 50 basis point reduction and a further two said the Fed would hold steady.
The U.S. economy likely lost momentum last quarter and is now forecast to have expanded at an annualized pace of 1.8% in the April-June period, down from 3.1% reported for the first quarter, according to the poll. Growth is expected to hover around that rate in each quarter through to end-2020.
But interest rate futures are pricing in three rate cuts this year - in July, September and December.
Beyond this year, the U.S. central bank is forecast to keep policy on hold until 2021, the poll showed.
· The European Union and four South American countries put an end to 20 years of trade discussions last month, but it is not yet clear whether their deal will ever see the light of day.
Brazil, Paraguay, Uruguay and Argentina agreed to open their markets to the 28 EU member states, despite recent criticism of multilateralism across the world. However, the trade deal is raising concern in some countries with strong agricultural sectors, such as France and Ireland. EU member states still have to ratify the agreement before its implementation as well as the European Parliament, and in some cases the national parliaments in different capitals will have their say too.
· For years, many large Chinese companies have chosen to list in the U.S. instead of Hong Kong or China. Now, amid a trade dispute between Beijing and Washington, one national champion may lead the way back home.
Nearly five years after Alibaba shattered records with a $25 billion IPO, the company is said to be planning a secondary listing in Hong Kong. Analysts told CNBC that other U.S.-listed Chinese firms may consider doing the same.
“I think there will be more … companies looking to move back to Hong Kong because we really don’t know what the U.S. will be doing,” said Kevin Leung, executive director of investment strategy at Haitong International Securities.
· China’s defense ministry on Wednesday indicated that the People’s Liberation Army could be deployed in Hong Kong as protests continue in the semi-autonomous city.
Ministry spokesman Wu Qian suggested such a deployment may occur if the Hong Kong government requests it, multiple news outlets reported.
· Oil prices edged higher on Thursday amid Middle East tensions and a big fall in weekly U.S. crude stocks, but gains were stemmed by a frail demand outlook amid increasing signs of slowing global economic growth.
Brent crude LCOc1 futures rose 28 cents, or 0.4%, to $63.46 a barrel by 0650 GMT, after dropping 1% overnight - the first fall in four sessions.
U.S. West Texas Intermediate crude CLc1 was up 27 cents, or 0.5%, at $56.15 a barrel, having dropped 1.6% in the previous session.
· “We see it as a current tug of war between the bull case of OPEC production cuts, political risk in the Gulf and the recent reduction in crude inventories, versus the bear case of slowing global growth and a ramp-up in U.S. production,” said Hue Frame, managing director at Frame Funds in Sydney.
The overall sentiment in the oil market has darkened as investors worry that slowing global economic growth will weaken demand for oil.
Reference: Reuters, CNBC, FX Street
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