13, August 2013

EUR/USD (a 4-hour chart)

EUR/USD (a 4-hour chart)

The growth of exports and industrial production in China served as a support for the PMI, showing that the second largest world economy is stabilizing and strengthening confidence in the soft landing scenario.

Capital flows have also worked in favor of Europe. Firstly, there has been a reduction in speculative long positions on the dollar, which is reflected in the futures market, which is seen as a proxy for the momentum and trend. Secondly, the U.S. money market funds are reported to have increased exposure to European bank papers. Thirdly, some reports suggest that international managers have transferred some funds in European bonds and stocks from the U.S. and Japan. Fourth, the recent cross-border acquisitions also showed a net inflow of direct investment in Europe.

There are several important economic data are to be published in the next few days, including the euro area GDP for the 2nd quarter, inflation in the United Kingdom and the state of the labor market, U.S. retail sales, inflation, industrial production, and the first regional survey for August. However, these data are unlikely to change the basic scenario for the summer holidays in the U.S. and Europe, and the corrective forces are likely to continue to dominate the foreign exchange market.

September will be a key month, the Fed is narrowed, the German (and Australian and Norwegian) elections, and a decision on the retail sales tax in Japan. This month will create opportunities for these macro developments. Volatility is falling, and it is often the case before the big moves (remember the effect of the spring).

Minutes of the meeting of the Bank of England are to be published on August 14, which may have limited impact on sterling, but a political statement should show a unanimous decision. A former board member of the Bank of England Charles Goodhart argued that "the British recovery is likely somewhat underestimated" and said that the IRS may eventually change the policy stimulus in the third quarter of 2016, as the economy gets on a more sustainable path.