Weekly EurUsd Outlook for July 29, 2024 – Rising Volatility and Political Shifts Shape Market Trends

• Kamala Harris will challenge Trump for the White House. Meanwhile, financial markets are sliding due to lackluster quarterly earnings from big tech, as investors await the Federal Reserve’s intentions.
• Few significant news from Europe, with Asia becoming the main source of important information. China has repeatedly cut interest rates, while the Japanese yen continues to strengthen, affecting carry trade strategies.
• EurUsd continues its gradual return amid increasing market volatility. The trading range remains alive and well.

Market Turmoil: Tech Earnings, Political Shifts, & Asian Economic Concerns

Financial markets are in a state of agitation. Uninspiring quarterly earnings from American big tech companies coincide with an uncertain political climate following Biden’s withdrawal and his replacement by Kamala Harris in the race for the White House.

However, it’s the news from Asia that is causing the most concern in the markets. After wrapping up the Communist Party’s plenary session without significant new measures to combat the real estate crisis, China has repeatedly cut interest rates in an attempt to exit a deflationary crisis. This has seemingly thrown Beijing’s authorities into a panic, as they struggle to make consistent and effective decisions.

The Chinese yuan is falling, while the Japanese yen has strengthened after significant declines in recent months. Following the Bank of Japan’s intervention in the currency market to support the yen, the market has continued to buy Japanese currency, pushing gains to critical technical levels. Since the yen is a typical carry trade currency, many speculators have had to close short positions due to margin calls.

As we enter August, a typically volatile period that is generally unfavorable for commodities and emerging market currencies, attention turns to the most critical U.S. data of the month: the employment report.

Technical Analysis: EurUsd Stability Amid Minimal Volatility and Interest Rate Spread Dynamics

All technical theories outlined last week are confirmed. The EurUsd equilibrium remains unchanged, volatility is at a minimum, and the market has no intention of moving out of its price range that has been in place since the last quarter of 2022.

The euro rises when bets on more aggressive interest rate cuts by the Fed increase and falls when the flight to quality grips financial markets, which are struggling with a correction drought that tests the nerves of bears.

Weekly Bollinger bands are an excellent tool to delineate the upper and lower limits where the market buys and sells EurUsd. Until this range is broken, there are no significant operational indications to proceed with. Therefore, 1.063 and 1.095 are the operational levels to monitor as initial points of attention.

It’s all about the spread, specifically the interest rate differential on 10-year maturities between American and German bonds. This is the recent story of EurUsd, which, since the beginning of the year (and shown on an inverted scale in the chart), has closely followed the spread between the U.S. Treasury Note and the German Bund. This means that the euro strengthens when the interest rate differential between the United States and Germany on longer maturities narrows (as recently when it touched 170 basis points with EurUsd near 1.10) and weakens when the spread widens.

This dynamic offers only a partial view of what decisively influences the forex market, namely the real rate differential, but it remains rational as investors shift their currency holdings based on the relative attractiveness offered by the paper from the two reference geographic areas. The market appears to have drawn a line in the sand at 170 basis points. Until there is a drop below this interest rate differential, it seems difficult for the euro to make a definitive attack on the 1.10 resistance levels.