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  •  The euro ends the week above 1.22
  •  Oil ends the European session in a strong position
  •  Ones to watch at the start of next week

The euro ends the week above 1.22

The European session has ended the week on a high. European stocks are up across the board and EURUSD bounced this afternoon after hitting fresh 2-year lows at 1.2163. The weakness was triggered by rumours that the ECB could cut the deposit rate even further in September after cutting it to zero at its meeting earlier this month. Negative deposit rates (the rate at which banks get by leaving their money with the ECB) can be a potent weapon used by a central bank to weaken its currency, hence the sharp reaction in the single currency. However, it did not last long and EURUSD roared back after rumours of large bids at 1.2160. Why am I telling you this? Because 1.2160 is now a key support zone in the short-term that traders should be aware of at the start of a fresh week. The bounce back to 1.2230 looks a bit like a dead cat bounce to me. The economic and political situation remains in a perilous state in the currency bloc, and politicians in the Northern member states seem to be back-tracking from the agreements that were reached at last month's EU summit. The markets hate it when politicians say one thing and do another, hence the euro could be at risk from more negative political headlines. We still think the path is clear for a move to 1.20 in the near-term. 1.2150 then 1.20 are key support zones, 1.2250 then 1.2320 are the next resistance levels of note.

The euro is likely to struggle further against the yen as political risk and the yield differential still stand in the way of euro strength. This pair is the safe haven of choice, and EURJPY has been a big mover this week. It broke out of the bottom of its recent range at 98.00 on Monday and has been declining to 96.50. It could attract decent selling interest above 97.00, and we wouldn't be surprised to see further selling after a decent period of consolidation in the coming days.

The rise in oil - is it telling us something?

Back in March, the oil price was a good precursor to deteriorating market sentiment, but it took other asset markets another few weeks before they followed the commodity markets lower. Brent crude has had a nice recovery after bottoming below $90 at the end of June, so it could lead markets higher? Brent ended the week above $101.60 - the 50-day moving average, which is now key support. Above here could open the way to $102.50 then to $105. This is helping to boost commodity currencies. We are looking for further weakness in EURAUD , which declined today, although EURUSD recovered.

Thus, could there be enough negativity be priced into the market? Maybe for the near -term, and we could see the recovery extend into next week. This is good for commodities and the Aussie, but we still think the euro will find it hard to shrug off the funding currency label, and could weaken even in an environment of risk seeking. Watch oil and gold for future market directions. Gold performed well today and rose to $1,590 - a key resistance zone. It may extend gains if the data released next week starts to recover. In the US we have CPI and retail sales, in Europe the German ZEW is the key.

Ones to watch:

We are watching Brent crude oil at the start of the new week (see above for explanation).


GBPUSD: this pair ended the European session above 1.5550 on Friday. The next major resistance zone is 1.5615 - the base of the daily Ichimoku cloud. If we continue to see the recovery in risk at the start of next week then this level could be breached. GBPUSD is starting to look a bit overbought, so we could see a pullback towards 1.5520, which may attract more buyers in an attempt to break the base of the cloud.



Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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