On Friday, the US jobs report came out better than expected with a fall in the unemployment rate and unchanged wage growth (against expectations of a drop). In our view, the jobs report supports our view that the Fed will announce “quantitative tightening” in September and hike again in December, given that the Fed tends to put most weight on the unemployment rate. However, we think risk is skewed towards the Fed pausing its hiking cycle, as wage growth and inflation are low.

In the UK, The Telegraph reported that the UK is ready to pay a divorce bill of EUR40bn
(against the EU’s estimates in the range of EUR60-100bn) but only if the EU starts negotiations about the future relationship. A Downing Street source later denied the story, (see The Guardian).

In our view, the divorce bill remains the biggest obstacle to the Brexit negotiations, not least given the weak minority government in the UK. Previously, the EU’s chief negotiator Michel Barnier had said the negotiations were proceeding too slowly, meaning that negotiations in phase 1 (divorce bill, citizens’ rights and Irish border) may not be concluded in October as hoped for.

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EUR/USD fell around one figure on the stronger than expected non-farm payroll (NFP) figure. We have been looking for a near-term push in EUR/USD towards 1.20. However, the price action on Friday following the NFP suggests that the recent strong rally in EUR/USD may be ending.

In any case, the EUR rally is likely to ease ahead of the Jackson Hole symposium on 24-
26 August and the ECB meeting on 8 September where the pressure is building on the ECB to raise concerns about the strength of the EUR. The effective EUR is now back to September 2014 levels before the ECB’s QE announcement in January 2015. Fundamentally, we expect EUR/USD to rise further over the coming 12 months on relative growth and valuations. We forecast EUR/USD at 1.17 in 1M and 3M before rising to 1.22 in 12M.

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