Euro: looking past oil volatility

00:00:00: Global markets started the week on a soft note as rising yields around the world and renewed oil volatility weighed in on sentiment on Monday's trading session.

00:00:08: The US dollar initially weakened, on softer U.S jobs inflation and retail sales data of past weeks which have helped temper expectations for Federal Reserve tightening.

00:00:19: but the dollar index rebounded today at crude prices pushed above the USD-USD per battle level.

00:00:26: Yet if you look beyond short term oil swings It coaches European central bank's sense, softer federal reserve rate expectations and longer-term concerns around the US debt.

00:00:36: And dollar debasement trade could continue to support the euro despite significant geopolitical risks in the short run.

00:00:48: Market Talk, it's August eighteenth and I'm Ipek Oskar Deshkere.

00:00:52: Today i will dive into the euro short- and longer term prospects.

00:00:56: but before do as always please keep in mind that opinions are my own.

00:01:01: this is not financial advice.

00:01:11: So the week started on a weak note for US and European equities as rising global yields reversed early Asian optimism.

00:01:18: And today, Nikkei is down by one point.

00:01:20: fifty-three percent in Japan at the time I'm talking here As the Korean Cosby Index failed to extend its gains above it's hundred day moving average In the FX markets.

00:01:29: The muted reaction oil prices weekend Middle East tensions How pulling the US dollar lower at the very start of this week across the board?

00:01:39: Having failed to break the hundredth resistance last week, The U.S.

00:01:42: Dollar Index took a dive to ninety nine point thirty level.

00:01:46: that was lowest levels since beginning June for the U. S. Dollar index.

00:01:51: Yet, the US dollar is rising again this morning as crude oil broke its early Monday silence later in session and U.S.

00:01:59: crude jumped past the eighty-five dollars per barrel level on renewed Middle East worries.

00:02:05: But zooming out since the u.s jobs data printed a negative number On first Friday of August The data was backed by softer than expected U. S inflation And softer then expected retail sales data.

00:02:17: on next week The U.S.

00:02:20: dollar has become more sensitive to the weakening US data.

00:02:24: that tames hawkish federal reserve expectations today for the rest of the year.

00:02:29: Now this situation flips, Of course when the rising oil prices accelerate and This is what we see today.

00:02:34: But the broader post FIMC trend Is that the soft u.s data And a softening Fed expectations or giving support to the major peers against a weaker US dollar.

00:02:45: Many now expect that the Fed will skip a rate hike in September and activity on Fed Fund's futures gives it more than one chance out of three for its twenty-five basis point hike next month from the Fed.

00:02:56: Now, In short run today, The Dollar yen is pushing higher again toward the critical one hundred sixty level on the back of a broadly stronger U.S.

00:03:04: dollar.

00:03:05: but looking at yesterdays trading session Monday's data actually showed unexpectedly slowed as KPEX declined in the second quarter of this year, somehow reversing the yen appreciation yesterday and the dollar-yen remains today at very uncomfortable levels for Japanese officials.

00:03:23: Reversing the Yen's depreciation sustainably has become a policy priority to the Bank of Japan and even the Japanese government.

00:03:32: According to former Finance Minister, the Bank should raise interest rates every meeting until it reaches mark to narrow the rate differential with other major occurrences, reverse the Yen's weakness in a sustainable manner.

00:03:47: But if the Bank of Japan is ready to do so, To hike interest rates into softening growth and investment numbers.

00:03:53: Building exposure to the yen Is still a risky trade.

00:03:56: It comes with the risk that Sanayitaka Ichi's government Could make a U-turn And repressure The Bank Of Japan for keeping Interest Rates as low As possible To prevent A full blown economic meltdown in japan.

00:04:09: So it has Still very fine balance That the bank of Japan & Japanese Government should walk.

00:04:14: That makes me think That it perhaps better before jumping into a long gain trade right now.

00:04:20: For the euro however, the outlook is improving.

00:04:22: The Eurodollar yesterday has pulled out the year-to-date bearish trending channel top and tested a major thirty eight point two percent Fibonacci retracement on January to June retreat to the upside.

00:04:35: clearing this resistance could push the Euro dollar into what can become more sustainable medium term bullish consolidation zone with support near the one fifteen one fifteen ten range an area that solid support since the beginning of August.

00:04:51: Again, oil prices will remain critical for U.S.

00:04:54: dollar short-term direction hence the euro dollars short term direction.

00:04:58: yet there are broader factors out there that are supporting the positive euro outlook.

00:05:03: one the softening federal reserve expectations versus a more cautious European central bank stance which is ready to tighten its monetary policy further to keep inflation in the Euro area under control.

00:05:15: but also the longer term USD basement trade that weighs on US dollar and a longer-term U.S.

00:05:20: Treasurer is today For the former, the central bank expectations.

00:05:24: The Fed ECB divergence plays in favor of a stronger euro-in-the-medium run.

00:05:29: In the US for example, the FOMC Minutes that are due on Wednesday will probably give little clarity how the Federal Reserve will react to inflation under the new Chair Kevin Walsh.

00:05:40: The recent confusion regarding the fed's new reaction function to inflation is among reasons why the U.S.

00:05:45: dollar lost ground over past weeks While Europe and European Central Bank Chief Christine Lagarde's comments do later this week could re-confirm the bank's cautious stance and keep the hawks alert.

00:05:56: Note that strong second quarter earning season for big European companies despite the Middle East led energy crisis, climate headwinds and the middle east wall softened an expected impact on european activity levels whether it was due to World Cup or summer months that forced people go out.

00:06:16: also give the European Central Bank a greater margin today to stay firm against the rising inflation threat.

00:06:23: in the coming months.

00:06:24: And for the latter, The Basement trade?

00:06:49: Bond issuance this year to finance the massive AI build-out is also thought to be competing with US Treasuries these days, hence contributing to gradual steepening of the US yield curve.

00:07:05: The latter could eventually support the U.S.

00:07:07: dollar at some point in time but on a shorter end.

00:07:10: if the economic data continues to soften and the federal reserves rate high bets then the short end should remain contained the US dollar appetite.

00:07:24: So consequently if we summarize all of this in a short one, If the Middle East Tension Trade eases again I expect to see Gays and the Euro Dollar extend above.

00:07:37: In the mid-term run, the pair will remain in their bullish trend building since the beginning of two thousand twenty five aboard a one thirteen fifty level which is that major thirty eight point two percent Fibonacci retracement on two thousand and twenty five to date appreciation.

00:07:54: But on the upside, we could see resistance into the one eighteen-one twenty range if U.S.-European rate differential widens sufficiently to cover for inflation and attract capital in US denominated assets with big technology bonds obviously vacuuming strong demand from international investors.

00:08:11: Yet the Big Technology companies don't only issue bonds than US dollars.

00:08:15: The dollar today accounts for roughly two thirds of big technology bond issuance but foreign currency denomination bonds have jumped more then a third this year.

00:08:23: issuing abroad reduces the amount of supply the US dollar credit market has to absorb and could relieve some upward pressure on U.S.

00:08:30: corporate yields, hence somehow limiting the US dollars' capacity rebound in a longer run also lifting the euro's prospects as funding currency internationally.

00:08:41: Note however that in short one a sharp rise in European yields due to geopolitical tensions.

00:08:46: an energy crisis would have the opposite effect of destroying growth outlook for Europe your appetite despite the rising yields while US dollar, U.S.

00:08:56: Treasuries complexes more immune to energy crisis as United States is a net exporter of energy whereas the European Union isn't net importer.

00:09:05: so that's perhaps the biggest risk-to-euros positive outlook in this shorter run but doesn't change the picture for longer run.

00:09:12: The long-run Euro outlook is positive today!

00:09:15: So this is all for this Tuesday.

00:09:17: I'm Ipega Skardishkaya and thank you for joining me.

00:09:22: supportive comments.

00:09:23: I hope this episode of Market Talk has been helpful and it has been insightful to you.

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00:09:52: So I will meet again tomorrow, until then good day

00:10:11: trading!