EUR/USD: A Case of Short-Term Undervaluation
The EUR/USD pair has been largely anchored due to subdued FX volatility post-CPI summer trading conditions. However, our models indicate a short-term undervaluation, supporting a moderately bullish bias for the coming weeks. Gulf headlines, while marginal, could impact relative value trades more than USD crosses.
Fedspeak: The Clear Catalyst
The market's conviction around further tightening by the Federal Reserve is strong, but I believe it's overestimated. Fedspeak, particularly the late-August Jackson Hole Symposium, offers the clearest potential catalyst for market moves. The CPI report leaned dovish without a definitive signal, and Beth Hammack's hawkish stance contrasts with Tom Barkin's doubts. I'm curious to see if more centrist members will soften their hawkish tone.
Retail Sales and Michigan Surveys
Today's US calendar includes July retail sales and University of Michigan surveys. These second-tier releases might need significant surprises to trigger a meaningful dollar reaction. The headline fatigue surrounding the Middle East, especially US-Iran negotiations, continues to impact oil prices and global bonds.
EUR: Undervaluation and Technical Support
Our models suggest EUR/USD's short-term fair value is around 1.160-1.1650, primarily due to a 10bp tightening in two-year swap rate spreads. This supports our positive bias, but a break above 1.160 is unlikely unless Fed communication surprises on the dovish side. EUR/USD bulls can be content with strengthening technical support around 1.1500.
JPY: BoJ Policy and Yen Strength
The Japanese government's tolerance for a faster tightening cycle by the Bank of Japan is surprising. The yen is failing to find lasting support, and markets now price a 75% chance of a 25bp hike in September. This should weigh on USD/JPY, but benign conditions favor the yen-funded carry trade. The risks to funding in yen are increasing, and USD/JPY could trade below 158 if the Fed keeps rates unchanged in September.
CEE: Central Bank Signals and Inflation
Turkey's central bank raised its inflation forecast to 28%, aligning with market expectations. The effective policy stance is likely to normalize as funding shifts from the overnight lending facility to the repo window. Romania's 2Q GDP figures and the National Bank of Romania governor's press conference are also key, with potential rate cuts discussed for early next year.
Conclusion: A Balanced Outlook
The market's focus on central bank signals and inflation forecasts is evident. While the EUR/USD pair shows short-term undervaluation, the broader outlook remains balanced. The impact of Gulf headlines on relative value trades and the yen's strength are notable, but the market's conviction around Fed tightening is a key factor. As an expert, I find these dynamics fascinating and believe they warrant careful monitoring.
