Euro: Pullback Or Correction?

It is the last week of August, and during this time of the year the markets are normally very quiet. Most people are off enjoying the final bits of summer and spending time with their families before school starts. Although 2020 is a year like no other, there should still be less participation, which means either tight trading ranges or low liquidity breakouts. The U.S. dollar is grossly oversold against high beta currencies like the euro, sterling, Australian, New Zealand and Canadian dollars. With extra unemployment benefits expiring, the U.S. recovery is losing momentum as manufacturing activity in the New York and Philadelphia regions ease. There are a few events on this week’s calendar that could inspire some moves in currencies, but for the most part we expect end-of-summer profit-taking on short dollar positions and quiet trading.

For the greenback, the main focus will be Federal Reserve Chairman Jerome Powell’s speech at Jackson Hole. He has no choice but to be cautious because even though new virus cases in the U.S. are stabilizing, unemployed Americans are receiving fewer benefits, which means retail sales will suffer. Considering that the Fed has no plans to raise interest rates for the next year, Powell’s outlook should not be very market-moving. Instead, investors will be more interested in the possibility of an inflation target. Inflation is low, and if the central bank wants to boost inflation expectations, Powell may suggest a specific target for the PCE deflator. Revisions to Q2 GDP are also on the calendar along with personal income and spending. July numbers should be better as a larger decline in consumption is expected in August.

The S&P 500 and Nasdaq hit record highs on positive coronavirus vaccine and treatment headlines. U.S. yields also traded higher reflecting the general optimism in the markets. USD/JPY perked up a little, but the dollar’s greatest strength was against other major currencies. Outside of New Zealand’s quarterly retail sales index, there were no major economic reports released in the last 24 hours. Consumer spending in New Zealand dropped more than 14% in the second quarter – although this was slightly better than expected, it is still the worst decline ever and explains the under-performance of NZD. The Australian and Canadian dollars also sold off versus the greenback but AUD was the best performing currency versus the greenback, while CAD was the weakest.

EUR/USD, which rejected 1.1850, will be in focus tomorrow with the German IFO report and revisions to their Q2 GDP scheduled for release. While investor sentiment improved, PMIs were weaker, a sign that the Eurozone economy is also losing momentum. This suggests that tomorrow’s German IFO report could decline, which may turn EUR/USD’s pullback into a deeper correction. Virus cases in Europe are also on the rise, with Germany, Italy and Spain reporting on Friday the highest daily coronavirus infections since April. As schools begin to open and the flu season picks up, the concern for a second wave could underpin the euro.