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Ahead of the Fed conference in Jackson Hole, Euro Oscillates and Markets Tense Up

By Patrick Higgins  |  22/08/2017 07:02
The value of the euro fell and rebounded slightly earlier today, topping off a week of slumps, continuing the largest decline the currency has seen since June.
 
Since falling -0.5% against the dollar last week, the euro slipped by a further -0.17% today to $1.1740 earlier this morning.  From those first morning postings, however, the euro has recovered slightly to $1.1772 as of 1:39 PM BST. This is still below this month's 2.5 yearly high of $1.19.
 
With the ECB moving lethargically towards tapering QE, the markets may have concluded that the euro's double-digit gains against the dollar this year were excessive.  Despite the pessimistic data, the euro is still up 11% against the dollar from the beginning of the year.
 
The European Central Bank (ECB) President, Mario Draghi (despite pressure to do so), will most likely not make new policy announcements at the upcoming Fed conference he is attending in Jackson Hole, Wyoming.  However, many currency traders are reluctant to take any risks, with over $45 billion worth of dollar-euro currency options expected to expire in the three days leading up to the conference, which may prompt many to sell.  Such sparsity of top-down news from the ECB, or any substantial data earlier today, had prompted the dollar index to rise to 93.56, as investors cut back on short bets against the dollar, especially those pinned with the yen.  Overall though, the dollar index has been on the decline this year.  Additionally, bearish bets against the dollar have been lessened, with positioning across currency markets becoming more stretched.
 
Sustained double-digit increases for the euro are unlikely without detailed ECB announcements regarding tapering.  Reluctance to address the issue of stimulus reduction in greater detail is only restricting euro growth.  On the opposite end of the spectrum, while the dollar has slowed its decline slightly, the continued political insecurity in the US shows no sign of abating.  Robert Mueller's special FBI investigation into the Trump Administration's links to Russia can only bring about more upheaval, so it is possible that the dollar index will continue falling off through the end of the year.  However, Fed Chairwoman Janet Yellen may take heart in the near-full labour market and sustained US economic growth seen this year, and her Jackson Hole speech will be monitored closely for any possibility of a potential Fed rate hike in December. 
 

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