Consolidation in the currency market

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The euro continued to trade in the green last week against safe havens and the pound sterling, although the gains were somewhat limited (less than +0.50% over the course of the week). It is safe to say that the market has entered a consolidation phase, a sign of increased caution among market operators with regard to two crucial points, neither of which is new.

The first concerns negotiations between Congress and the White House on additional measures to support the economy, on which progress is expected to be made this week.

The second relates to the further escalation in the trade war between the United States and China. Having first gone after 5G specialist Huawei, followed by video-sharing app TikTok, the Trump administration now has WeChat, China’s free calls and instant messaging app, which stands accused of espionage, in its sights. Furthermore, according to Bloomberg, the US may once again impose sanctions on several leaders of the former British colony of Hong Kong who are portrayed as Beijing’s lackeys.

It is clear that the resurgence in risk factors in August, when trading volumes are traditionally low, is a factor to consider and could benefit safe havens in the immediate term.

EUR/USD: US jobs data an excuse for profit-taking

It should be added that the somewhat reassuring US jobs figures also provided an excuse for market operators to rake in a certain amount of profits on the EUR/USD pair. As Donald Trump had promised earlier in the week, the jobs report, or Nonfarm Payrolls report, has proven rather positive if we consider market expectations. The headline data all turned out better than the consensus figures. A total of 1,763,000 jobs were created in July (against economists’ estimates of 1,480,000), the unemployment rate fell to 10.2% of the active population (the consensus level being 10.6%) and even the increase in the average hourly wage was better than anticipated.

The only slight hiccup was the participation rate, which, at 61.4%, was below consensus levels and lower than in June. This means there is a significant proportion of inactive individuals in the working-age population, who may conceivably be dispirited unemployed workers. This mediocre figure calls for caution on the momentum of the recovery in the US. There are still many areas of weakness.

Commodity currencies rally

Lastly, the euro lost ground against the commodity currencies we monitor, both the Australian dollar and the Canadian dollar. The EUR/AUD pair fell by 0.53% over the week while the EUR/CAD was down 0.32%.

This was caused by several factors. Among these, the reassuring figures for the recovery in China, which primarily supported the AUD, and more generally, the continuing upward trend in commodities. WTI is up by 2.30% over the past week, with Brent climbing 2.70% and an ounce of gold by 4.10%, after breaking the symbolic threshold of $2000 for the first time.

The increase in energy prices is more to do with better market balance than with any real improvement in terms of outlook for the global economy. If we add to that the fact that, despite monetary and fiscal policy measures adopted, the Australian and Canadian economies are in a particularly precarious position, we cannot but continue to think that the euro has every chance of besting the AUD and CAD in the short term.

Our target for EUR/AUD is for the pair to overtop its long-term range of 1.6080 and 1.6580. On EUR/CAD, we are watching closely for the pair to break through the sticking point of 1.5970, which would help give it new upward momentum.

Economic calendar:

11 July EUR

ZEW Economic Sentiment Index for Germany for August

12 July GBP

UK GDP for Q2 and manufacturing output for June

14 July USD

US retail sales for July