Big Week For The Euro And USD/JPY

Big Week For The Euro And USD/JPY

Kathy Lien  | Dec 10, 2019 00:23

Daily FX Market Roundup

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

The holidays may be approaching but there’s at least at least one more week of potentially big moves for currencies before we settle into the seasonal lull. With two monetary policy announcements and a big decision on tariffs for U.S. President Trump, an expansion in volatility is almost a certainty. It’s a particularly a big week for EUR/USD and USD/JPY. Both currency pairs saw very little movement on Monday but as the week progresses, breakouts are expected. For the euro, Christine Lagarde will be overseeing her first monetary policy announcement as ECB President. She’s spoken a number of times since taking office but has kept her policy views close to the chest. Sharing her outlook will be unavoidable at this month’s press conference and chances are she’ll opt to maintain status quo at her first meeting. We know the ECB believes that policy needs to remain accommodative and governments need to do their part to boost the economy. Germany may have avoided recession but inflation is low and growth is slow. For all of these reasons, there’s very little benefit to Lagarde to rule out further easing. The economy is just beginning to take a turn for the better but it's deep in the woods so for the central bank head, it pays to see if the recovery continues before shifting the central bank’s course dramatically. This is especially true if President Trump fails to make a decision on the next round of Chinese tariffs before the ECB meeting.

For USD/JPY Trump’s decision on the next round of Chinese tariffs, which is scheduled for December 15th overshadows the Federal Reserve’s last meeting of the year but that only assumes it happens this week. Trump could decide to make the announcement after the markets close on Friday at which point the reaction will be the following week. This scenario is very likely if he decides to move ahead and impose tariffs. The Federal Reserve and the European Central Bank are widely expected to leave policy unchanged and for both central banks, guidance is key. In the case of the Fed, most policymakers do not feel that additional easing is necessary and Friday’s blowout nonfarm payrolls report validates their views. The President wants the Fed to continue lowering interest rates but data has been good and the central bank could opt to focus on the improvements in the economy. So, as long as Trump does not announce that more tariffs are coming for China on December 15th before Thursday, the risk is to the upside for the greenback.

The U.S. dollar started this new trading week higher against most of the major currencies but the rally has been cautious ahead of this headline driven week. Unfortunately the market is as clueless as we are on Trump’s decision which makes it this week’s biggest risk. Aside from FOMC, U.S. inflation and retail sales numbers are also scheduled for release. If the Fed is optimistic and the Trump administration does not lead the market to believe that the tariffs are on, USD/JPY will trade above 109. However, if the White House gets tough on China, then good data or Fed optimism won’t help USD/JPY .

In contrast to the gains enjoyed by euro, sterling and USD/JPY, the Australian and New Zealand dollars traded lower on the back of softer Chinese trade data. Exports continue to feel the pain from tariffs and the fear is that the toll will grow exponentially if tariffs increase further this month. It will be interesting to see if Reserve Bank of Australia Governor Lowe finds any of this concerning when he speaks. The last RBA statement was not as dovish as investors had anticipated, but U.S.-China trade relations have chilled since then.

Kathy Lien

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