EURUSD still slightly downwards biased, as USD liquidity will re-shrink in coming weeks. The ECB’s indicator of negotiated waves has climbed to its highest level since 2012, and the same applies to the Euro-area labour cost index. While it is extremely unlikely the ECB will alter its dovish forward guidance of no hike until after the summer of 2019 any time soon, with cost pressures building the next shift will likely be a hawkish one. Nordea short-term model of Euro-area PMI suggests downside risks to the September figures. As the Federal Reserve has tried to tighten financial conditions, it has primarily succeeded in doing so in EM countries. Weaker EM activity will eventually “spill back” on the US, but also on the Euro-area. In the end, Nordea lower their confidence in the EUR/USD but keep their negative bias as they suspect i) Euro-area PMI’s might weaken more than penned-in by the consensus, ii) the US Treasury will remove excess dollars from the US financial system in coming weeks, and iii) the market may need to revise its view of the US’ neutral rate in a hawkish direction.
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