Euro Rallies To 31-Month High

August 28, 2017

| Fullerton Markets

Draghi may announce QE tapering within the next two months, buy EUR/USD?

Draghi said global recovery is firming up, suggesting he is comfortable with less accommodative policy

Euro rallied to its highest level in more than two years against the dollar after Jackson Hole meeting. ECB President Mario Draghi did not express concern about the strong euro zone currency as some investors had expected earlier. It is very likely Draghi has increased his tolerance on a stronger euro.

Euro climbed 13% against the dollar this year to date, as it benefited from the political turmoil in White House and Fed’s gradual monetary tightening pace. A strong euro is a headwind for the export-driven euro zone economy. That’s why traders thought Draghi could use Jackson Hole conference to talk down euro. Instead, Draghi focused on other aspects such as solid global recovery in his speech.

Draghi said global recovery is firming up. He noted in Europe and Japan, consolidation of the recovery is at an earlier stage versus that of US. That probably suggests ECB is almost ready to shift its ultra-loose policy towards neutral.

Euro had already begun to strengthen against US dollar after Fed Janet Yellen did not address future monetary policy in her Friday speech. Yellen said the financial system is safer now than it was at the time of the financial crisis about a decade ago and did note the regulations may need some adjustments. Dollar index dropped to more than one-year low after the speeches by Yellen and Draghi.

We think the improving economic signs will also have to translate into political action this fall, with ECB’s asset purchases due to expire at the end of this year. It means the central bank will either have to extend those purchases or start winding them down. There is a high chance ECB will announce the tapering of these assets within the next two months.

On Fed side, Janet Yellen did not reveal much on upcoming US monetary policy, but she delivered a message to President Trump. She made it clear if he re-nominates her as Federal Reserve chair, she will not turn her back on the raft of US financial reforms that Republicans want to roll back. This is a hint to the market; Yellen may not be re-nominated by Trump next February.

Our Picks

EUR/USD – slightly bullish. No verbal intervention from Draghi last Friday, this pair may test 1.20.

USD/JPY – Slightly bearish. This pair may fall towards 108.85.

XAU/USD (Gold) & XAG/USD (Silver) – Slightly bearish.

Gold is approaching its key resistance level near 1300, we think price may not break this level in near term and fall towards 1275 before edging higher again.