- EUR’s stability well contained
- Investors have confidence in the ECB
- Fed to maintain dovish strategy
Restricted to a tight trading range against the U.S. dollar, the euro is holding steady against the greenback to end the week despite Thursday’s mini-capital markets meltdown thanks to Portugal’s highly publicized banking problems. The EUR’s stability suggests investors believe that Portuguese banking concerns are relatively self-contained.
Investors must be confident that eurozone policymakers have the necessary mechanisms in place to deal with any real blow out in bond yields for the currency bloc’s peripheries.
Regarding central bank interest rate yield differentials, the pace of the U.S. Federal Reserve’s rate-hike expectations have certainly been dialed back this week, especially after the Fed’s June minutes release last Wednesday.
For the European Central Bank (ECB), fears over the eurozone’s economic growth, coupled with Portugal’s financial concerns, will serve to soothe any euro rate-hike anxieties for the time being. The futures market is currently pricing in a +41% Fed hike for June 2015, down from +61% at the beginning of this week before the Federal Open Market Committee minutes were made public.
Next week, investors will be tuning into Fed Chair Janet Yellen’s semiannual testimony before Congress. No surprises are expected. The majority of the market will be expecting the Fed to maintain its dovish stance, again signaling that U.S. policy tightening will remain well beyond the end of the Fed’s tapering in October.
With no data to work with on Friday, the FX market will be looking to next week in a search for commitment that the general thawing of yesterday’s blast of risk aversion will have stamina.
A Look Ahead
From a European perspective, the economic calendar is light, certainly a sign that capital markets are heading toward the infamous summer doldrums. However on Monday — likely the highlight of the week — ECB chief Mario Draghi is due to testify on monetary policy before the Committee on Economic and Monetary Affairs at the European Parliament in Strasbourg. On Tuesday, German ZEW economic sentiment is released. It’s a level of a, “diffusion index-based on surveyed German institutional investors and analysts.” Anything negative or positive from Europe’s dominant economy could have a potential impact on the EUR.