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How Markets Reacted to Central Banks' Mixed Messages Last Week

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Part 5
How Markets Reacted to Central Banks' Mixed Messages Last Week PART 5 OF 7

Will the Euro Continue Its Momentum?

Euro regained momentum after weak US data

The euro-dollar (FXE) pair closed at 1.147 in the previous week with a 0.60% appreciation against the US dollar (UUP). Weaker-than-expected US retail sales (XRT) and inflation data led to the weakness in the US dollar, and the cautious comments from Fed chair Yellen accentuated the losses. Euro traders were quick to shore up the currency, taking the pair to a new one-year high of 1.149 against the dollar. Economic data from the Eurozone remained in line with expectations. European industrial production stood out with a 1.3% increase in May against market expectations of 1.1%.

European equity markets (VGK) remained in positive territory in line with global markets with the German DAX (DAX) up by 1.5%, the Euro Stoxx (FEZ) up 1.3%, and the FTSE 100 up 0.11% in the previous week.

Will the Euro Continue Its Momentum?

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Euro bulls back in play

As per the latest Commitment of Traders report released on July 14 by the Chicago Futures Trading Commission (or CFTC), currency market speculators had added 6,324 euro long contracts as of Tuesday. The total net speculative bullish positions on the euro stand at 83,788 contracts. Investors will monitor the ECB as markets prepare for a policy tightening announcement from the ECB. The euro (EUFX) is likely to test the 1.15 mark against the US dollar before the meeting while the European bond market (BWX) will remain volatile before the key event on Thursday.

All eyes on the ECB

Markets will remain focused on the ECB policy meeting scheduled for Thursday this week. Mixed messages from the ECB in recent weeks have increased volatility and will likely remain elevated ahead of the meeting. We don’t expect any announcement of tightening in this meeting, but the ECB will try to calm markets’ nerves. Overall, this week is likely to be a positive one for the euro. Only dovish comments from the ECB, which are highly unlikely, are likely to derail the bullish run on the euro.

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