EURUSD on Friday fell from a 1-week high and closed down -0.23%. The Dollar recovery weakened the euro, in addition to weaker than expected Eurozone economic news, weighing on the Euro. Eurozone Q2 GDP was revised lower and July German and French industrial production fell more than expected. However, the currency pair remains 3.4% higher, since the start of the third quarter, as evidence of US labour market weakness reinforced dovish Fed bets. This was confirmed by successively weak non-farm payroll figures released by the BLS in August, prompting markets to position for a series of Fed rate cuts.
- Eurozone Q2 GDP was revised lower to +0.2% q/q from the previously reported +0.3% q/q.
- German July industrial production fell -2.4% m/m, weaker than expectations of -0.5% m/m.
- French industrial production in July fell -0.5% m/m, weaker than expectations of -0.3% m/m.
- German trade data was better than expected, as July exports rose +1.7% m/m, stronger than expectations of +1.1% m/m. In addition, July imports rose +5.4% m/m, stronger than expectations of +0.7% m/m and the highest in 3¼ years.
There was some encouraging news on the inflation front, as headline inflation slowed to 2.2% y/y in August and compensation per employee slowed to 4.3% in Q2. However, services inflation remained strong, showing a 4.2% rise in August, which argues against too aggressive a rate cut.
The European Central Bank will announce its monetary policy decision this week, which is expected to provide further monetary easing. Markets are betting that the central bank will deliver a 25bps rate cut. The central bank is likely to reiterate that it is data-dependent and will take its approach on a meeting-by-meeting basis.
The ECB’s latest economic projections will also be closely watched. In its June projections, the ECB expected CPI ex-food and energy inflation of 2.0% by 2026. However, the forecast could remain unchanged or even be revised slightly higher in the September projections. If the ECB’s directives and projections go as expected, this is a form of support for another pause in October, before the next ECB rate cut in December.
In the Forex market, the Euro slipped below the $1.110 mark after registering a one-week high of $1.1154 below the August high [$1.1200], as investors assessed the latest economic data for clues on the magnitude of interest rate cuts by the ECB and the Fed. GDP growth in the Eurozone was revised lower to 0.2% during the second quarter, in line with concerns that tight monetary policy is having a greater impact on the bloc’s economy, especially in its largest member, Germany.
From a technical perspective, EURUSD recovered to the 1.1154 level last week, but failed to maintain momentum and has pulled back since then. The overall bias remains neutral so far and negative intraday. The price movement from the 1.1200 level is still seen as a consolidation pattern. In case of a deeper pullback, a drop below 1.1025 minor support will be capped by the 38.2% retracement level of the 1.0665-1.1200 pullback at 1.0996 level, or further down to the 50%FR [1.0932] level to generate a rebound. On the upside, a break of the 1.1200 level will resume a larger rise towards the 1.1275 high.
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Ady Phangestu
Market Analyst – HF Educational Office – Indonesia
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