Risks remain, however, and while the market appears somewhat oblivious to them for now, there are actually quite a few to consider. Among them, persistent tensions between India and China, which has caused New Delhi to adopt protectionist policy with regard to Chinese business activity, as well as continued tensions in Hong Kong, which not only concerns China, but also Europe, the United States and many others. In addition, we are witnessing the emergence of renewed antagonism between Turkey and the European Union on the subject of Turkish naval intrusion into Cypriot territorial waters.
In truth, the foreign exchange market’s muted response may be explained, to some extent, by cashflow injections enacted by central banks over the past three months. This has had a numbing effect on market operators. As long as central banks are ready and willing to intervene, risk perception will diminish. Though it is perhaps an understatement to say so, they have perfectly fulfilled this mission until now, which has led to a ballooning of their balance sheets. To this end, the balance sheet of the Bank of England (BoE) as a percentage of GDP now finds itself at its highest level since… 1700! That of the European Central Bank (ECB) currently represents 50% of euro zone GDP, and this figure should climb to 61% by the end of this year. Japan remains the ultimate record-holder, however, with a central bank currently representing 117% of GDP. This is expected to rise to 125% before year end.
Indeed, central bank interventions have been able to stave off a potential liquidity crisis, thus avoiding a scenario similar to that of 2007-08. That said, it remains unclear whether they can do much to placate the second wave of economic challenges on the horizon. These instances may yet shake up financial markets, with the currency market being no exception. If it were to occur, an upset of this kind may be expected by September at the latest.
With all this in mind, we maintain a bearish bias on the EUR/USD in the medium term, while considering the psychological threshold of 1.10, which has already been reached on no less than four occasions since the beginning of this year. If this level were to be reached once more, we might expect the pair to dip lower still, reaching the 1.08 mark.
Economic calendar:
DATE | CURRENCY | EVENT |
---|---|---|
This week | EUR |
Presentation of a newly compromised version of the European recovery plan, “Next Generation EU” |
6 July | USD |
US Non-manufacturing PMI for the month of June |
7 July | USD |
JOLTS report on US employment for the month of May |
10 July | USD |
US producer price index for June. |