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EUR/USD: Torn between an ECB, the Fed and global risk sentiment - Commerzbank

FXStreet (Córdoba) - Euro zone inflation data and the US labour market report are likely to set the tone on currency markets next week, said Esther Reichelt, analyst at Commerzbank. EUR/USD thus remains torn between an ECB that tends to turn even more expansionary, a Fed about to start the lift-off and global risk sentiment in general.

Key Quotes

“Monetary policy has an impact on exchange rates but exchange rates also affect monetary policy (particularly at the moment). Both the Fed and the ECB have recently put particular emphasis on the importance of currencies for their respective monetary policy. After all, the currency is currently regarded as one of the major drivers of inflation, in addition to oil prices, while inflation in turn determines central bank timing and action”.

“ECB President Mario Draghi had used the press conference after the September meeting to point out the risks resulting from the problems in the emerging markets. Since then, ECB members have kept stressing that the ECB would be ready to ease its monetary policy further in case of additional risks to inflation and the economy in the euro zone. This aggressive rhetoric has already started to affect the currency market: Unlike in mid-August, the euro no longer benefits from higher global risk aversion as any new piece of bad news from the emerging markets increases the chance of ECB monetary policy turning even more expansionary, thus weighing on the euro”.

“If, as we expect, the rate of inflation moved down to the zero line in September, this would be an additional signal for the currency market that further monetary easing is not off the table. The euro should tend to suffer”.

“Initially, however, the Fed is likely to prevent excessive losses, particularly against the US dollar. At its September meeting, the Fed increasingly shifted its focus to the risk of too low inflation, thereby emphasizing the role of the dollar. Any excessive and overly rapid appreciation of the dollar should render an interest rate hike this year even less likely from the market’s point of view, which in turn dampens any potential downward moves in EUR-USD”.

“Another strong labour market is therefore also likely to benefit the US dollar only to some extent. What is true of next week, also applies to coming weeks: The fundamental environment argues for a decline in EUR-USD, albeit a slow and volatile one”.

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