Since the European Central Bank (ECB) surprised the markets by cutting rates and raising deposit rates almost two weeks ago, the EUR/USD has entered a consolidation phase. On several different occasions, the pair has attempted to progress towards 1.30, but found stubborn resistance between 1.2960 and 1.2987. As long as the pair continues to find resistance between these levels, we are looking at a potential ceiling for the EUR/USD.
EU economic optimism clearly remains weak and while comments from the OCED on Monday that a slow recovery among nations using the euro is holding back the global economy has certainly not helped raise optimism, the EU sentiment has been dealt a further blow by this morning’s German ZEW Survey missing expectations. The ZEW Survey has now declined for 9 consecutive months and this release will quieten hopes that German economic data was returning to consistency following the latest German Factory Orders and Trade Balance being declared above expectations.
In regards to what impact German data disappointing can have on EUR/USD, I remember ECB President Mario Draghi expressing during August that “the fundamentals for a weaker exchange rate are better now than a few months ago” and there is no better way to ensure a weak euro exchange rate than for German economic data, to disappoint.
Although the EUR/USD is currently being traded in a consolidation phase, this should not last for long and as long the right fundamentals align, there is potential for the pair to make further movements lower as the week progresses. On Wednesday, the latest EU CPI (inflation) figures are released and it is no secret that the eurozone is currently plagued by low inflation levels. EU inflation figures for August are expected to remain near 6-year lows but if the CPI unexpectedly declines, this would provide verification for the ECB’s unexpected action earlier this month.
Then on Wednesday evening, the latest FOMC decision is due and it is widely expected that the Fed will taper quantitative easing (QE) by a further $10bn. As usual, investors’ attention will be focused on possible hints regarding when interest rates may rise and although I am not expecting any clues to be given, the Federal Reserve should announce a formal conclusion to QE in October. Confirmation of QE concluding in October should attract investors towards the Greenback, as it would reaffirm that the Federal Reserve are moving closer to normalizing monetary policy and consequently, add pressure on the EUR/USD.
Possible EUR/USD support can be found around 1.2892 and the current yearly low, 1.2858. If the euro bears take control, further support can be found at 1.2837.
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