Euro May Rise on Confidence Data, US Dollar Vulnerable

The Euro may rise as July’s consumer confidence report bolsters the ECB policy outlook. The Dollar remains vulnerable to negative US data surprises.

Talking Points

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  US Dollar Selling May Continue as Soft Data Undercuts Fed QE “Taper” Bets
  


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  Euro Could Strengthen if Consumer Confidence Report Bolsters ECB Outlook
  

The US Dollar underperformed in overnight trade, sliding as much as 0.2 percent on average against the major currencies. The move seems to have reflected Asian traders’ response to developments in Wall Street trading hours: Existing Home Sales data disappointed as we suspected, weighing against expectations of a near-term reduction in Federal Reserve stimulus efforts and leading the greenback lower. Relatively longer-lasting QE increases USD dilution risk compared with the alternative. The sentiment-geared Australian and New Zealand Dollars outperformed as the prospect of continued monetary policy support for the world’s largest economy underpinned risk appetite and drove Asian stock exchanges higher.

Looking ahead, an early estimate of July’s Eurozone Consumer Confidence reading headlines an otherwise lackluster European economic calendar. News-flow from the currency bloc has increasingly outperformed relative to expectations (according to data compiled by Citigroup), which seems to have been at least somewhat supportive for ECB policy expectations. Meanwhile, the Euro continues to track closely with the front-end yield spread, suggesting another upside surprise this time around may underpin the rates outlook as well as the single currency.

Later in the day, the spotlight shifts back to the US data docket. May’s House Price Index and July’s Richmond Fed Manufacturing Index are on tap, with minor improvements expected on both fronts. As we noted previously however, US economic outcomes have returned somewhat lackluster results on the whole compared with economists’ forecasts. This keeps the door open for disappointing results that undercut QE “taper” speculation and compound downward pressure on the Dollar.

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— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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Euro May Rise on Confidence Data, US Dollar Vulnerable