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Euro Firms as ECB Minutes Reignite Debate over Policy Tightening

10 July 2017FXEurope
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Minutes from the European Central Bank's meeting in June revealed that officials had discussed whether to end the central bank's promise to step up the pace of bond purchases if needed. Although the bank decided to maintain the guidance, they ended a similar promise to cut interest rates further.

EURO BLOC

Strategy: Euro resilience likely to come through against the crosses

The market interpreted the ECB's comments to imply that the bank will allow moderately higher yields and a stronger EUR. But with the 10-year German bund yield and EURUSD around 0.5% and 1.14000 respectively, Citi analysts believe that the move may have peaked for now. Instead, Citi analysts see the potential for the EURUSD to weaken to 1.1109-18. While the minutes point to a more resilient EUR going forward, they believe this is better expressed against the JPY, GBP and AUD than the USD.

USD & JPY

Strategy: Average hourly earnings key in tonight's US jobs report.

Investors have lowered their expectations for tonight's US jobs report after ADP reported that the US created fewer than expected private sector jobs in June. However, Citi analysts believe that the average hourly earnings component will be key in tonight's US jobs report release.

COMMODITY BLOC

Strategy: CAD outperformance likely to continue on selected crosses.

If the USD continues to maintain momentum, it will be challenging for the AUDUSD to cross 0.7700. In Citi's view, even if the US payroll reading disappoints tonight, wider policy divergence is likely to cause the AUD to weaken against the EUR, CAD and NZD.

With the markets fully expecting a 25 basis points hike by the Bank of Canada (BoC) next week, the question is whether Canadian payrolls can be strong enough to lead the BoC to hike again in September. Such a move will be positive for the CAD. In particular, Citi analysts believe that the AUDCAD could move meaningfully lower if it breaks the 0.9845 level.

EMERGING ASIA

Strategy: USDSGD appears poised for a rebound

Citi analysts see upside risk for Singapore's inflation over the next 12 months. This raises the probability that the Monetary Authority of Singapore may tighten policy at its October meeting. While economic settings for Singapore may be more encouraging, USDSGD appears poised for a bounce. According to Citi analysts, a break through the 1.3914 level would potentially open the way for 1.4129.

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