The competition of being the worst is underway

Recently, the foreign exchange market can be described as a large-scale competition. As the fundamentals of Europe and the United States are gradually contracting, whoever can grasp the pace of interest rate cuts and achieve a successful soft landing will stand out. This week, there have been some significantly different performances in the fundamentals of Europe and the United States, let's review them below.

1. PMI: UK > US > EU

The August S&P PMI data released yesterday was similar to that of July: the United States saw rapid contraction in manufacturing but astonishingly high performance in the service sector; the Eurozone has been consistently weak in manufacturing, with the service sector boosted by the Olympics; the United Kingdom performed well in both aspects, with the manufacturing PMI being the highest among Europe and the United States.

2. Central Bank Meeting Minutes: Dovish Fed, Hawkish ECB

The minutes of the Federal Reserve meeting released early yesterday were quite dovish, with the vast majority of officials agreeing on a rate cut in September, while some officials believed a rate cut should have occurred in July. Subsequently, "New Fed Communications" Timiraos also highlighted this statement on social media.

In contrast, the ECB meeting minutes released last night were different. Despite acknowledging the deterioration of economic fundamentals, officials remain concerned about high inflation in the service sector. They have also postponed the forecasted inflation target achievement from the second half of 2025 to 2026, which may affect some officials' attitudes towards future monetary policy.

3. Downward Revision of Non-Farm Payrolls in the US

Data released this Wednesday showed that from April 2023 to March 2024, the total number of non-farm payrolls in the United States was revised downward by 818,000, with an average monthly revision of 68,200.

Interestingly, the market seemed to have started trading the downward revision of non-farm payrolls as early as last Friday, making the significantly better-than-expected retail data from last Thursday completely irrelevant. Foreign institutions' forecasts ranged from 300,000 to 1,000,000, but the market traded as if it were 1,000,000. In the absence of new information, this caused the Dow to drop 200 points over three days, which was quite aggressive. When the data was released, there was a spontaneous market reaction at 22:00, only to later realize that the report was unusually delayed. By the time the data was released at 22:30, the market had already settled, playing a game of "I anticipated your anticipation".

Therefore, from the recent fundamentals perspective, the United States may indeed be weaker than the United Kingdom. Coupled with the conclusion of this round of recession trading, high beta currencies like the British Pound also have emotional recovery factors, explaining the Pound's strength to some extent. However, with the weak fundamentals in the Eurozone, what exactly is supporting the Euro

In our view, the recent rise in the Euro is actually all thanks to the US Dollar. Poor US data and the market's aggressive shorting of the US Dollar have led to such excitement that the market has almost ignored data from other economies prior to the US. As the currency with the highest weight in the US Dollar Index, the Euro is inevitably appreciating passively. Additionally, the highly anticipated Jackson Hole meeting is here, and the market may be waiting quietly for Powell's speech tonight, hence staying put for now.

Therefore, if Mr. Powell's speech tonight can somewhat soothe the market's overly aggressive sentiment (e.g. "recent market reactions have been somewhat excessive") and firmly indicate that the Fed's pace of rate cuts will be "gradual and methodical," then the good times for the Euro may come to a halt, initiating a pullback; conversely, if Powell's speech is unclear or dovish, failing to resist the fervent market, further weakness in the US Dollar may push the Euro higher again.

But at least for now, I still believe that the upside potential for the Euro is limited, after all, in the competition of fundamentals, the Eurozone has always been the weakest link...

Author: Zhang Haoyu, Source: Zao An Huishi, Original Title: "Ongoing Competition of Weakness"