Eurozone: Strength persisting - BBH

The euro finished its fifth weekly advance, though it remains a little below the peak of about $1.1910 set on August 2, points out Marc Chandler, Global Head of Currency Strategy at BBH.  

Key Quotes

“It rallied ahead of the weekend, and 0.4% advance was also the weekly gain.   The technical indicators did not respond much to the pre-weekend gain, but many still have their sights set on the $1.20-$1.22 area, with Draghi's speech at Jackson Hole anticipated to provide new cues.”

“The US premium over Germany is a little above 200 bp.  This is near its 20-day average.  A widening premium tends to give the dollar better traction.  The 10-year premium has widened to 180 bp from the year's low near 170 bp reached in mid-July, and which incidentally is the weekly average in 2016. Recall that the US premium peaked last December near 235 bp.  Since the end of the last year, the 10-year US yield has fallen by 25 bp while the German yield has risen 19 bp.”

“Economic data in the week ahead include a second look at Q2 GDP (0.6%) and final July CPI (1.3% headline and 1.2% core). July industrial output figures kick off the week, and the risk is to the downside of the median expectation for a 0.5% decline.  It appears that the economic momentum stalled at the beginning of Q3.   Most likely the data will not alter expectations for the September ECB meeting.”

“There are some observers who warn of disappointment then as officials wait for the October meeting to announce its early 2018 intentions.   While that is possible, it seems to us that the ECB will have the staff forecast update in September, giving it a reason to act.  Waiting until the October meeting would seem to break that pattern, and would be vulnerable to criticisms of waiting until after the German elections toward the end of next month.”