DailyFX.com - Euro Rebound Likely Temporary as ECB Convenes on Thursday

Fundamental Forecast for Euro: Neutral

- EURAUD, EURGBP, and EURJPY warned of a potential Euro rebound by Tuesday.

- EURUSD boosted by ‘baked-in’ NFPs, technical structure bearish below $1.3475 as USD rally takes shape.

- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

Despite its own issues beginning to crop up, the Euro was able to post a rebound across the board over the past five days (but for in EURUSD, -0.02%). A rather barren economic docket combined with exogenous factors proving more worrisome for the other major currencies gave way for the 18-member currency to pump the brakes on its recent decline ahead of the European Central Bank’s August policy meeting.

The first week of the month typically brings about significant economic data, and this first full week of August is no different. On Tuesday, the final July Euro-Zone PMI Composite (54.0 expected unch.), final July Euro-Zone PMI Services (54.4 expected unch.), and June Euro-Zone Retail Sales (+0.5% expected from 0.0% (m/m), +1.4% expected from +0.7% (y/y)) are due. All the data point to a modest pace of growth in the Euro-Zone midyear, nothing to be excited nor dismayed about.

Economic data in the Euro-Zone has started to steady in recent weeks, as evidenced by the sharp rebound in the Citi Economic Surprise Index, which closed the week at -24.9, well-above the July and yearly low set on July 21 of -43.3. Yet even as the European Central Bank meets on Thursday for their August policy meeting, it is unlikely that an optimistic tone regarding the region’s growth prospects is sounded too loudly: inflation stubbornly remains on a downward trajectory.

The 2014 Euro-Zone CPI forecast held at +0.70% the week ended August 1 from +0.90% three-months earlier; the 2015 Euro-Zone CPI forecast held at +1.20% the week ended August 1 from +1.30% three-months earlier; and the 2016 Euro-Zone CPI forecast held at +1.60% the week ended August 1 from +1.70% three-months earlier. Soft inflation expectations are dogging the Euro in the near-term, with the July Euro-Zone CPI Estimate reported at only +0.4% y/y on Wednesday.

In recent weeks, ECB officials have highlighted the importance of the inflation cog in the ECB decision making mechanism. On July 16, Benoit Coeure said "Given low inflation today in Europe still being far away from our target of price stability, there is a view on the Governing Council that rates will stay low for an extended period of time." German representative and Bundesbank President Jens Weidmann noted on July 18 that "the task now is to prevent an excessively long period of low inflation. Because that could paralyse the euro area's economy.”

Given the state of affairs in the region it is likely that the ECB meeting this week offers no clear path forward. On one hand, the constant nature of low inflation is obviously concerning. On the other hand, ECB policymakers still would like to avoid introducing any new substantive measures while the banking stress tests are being processed, keeping any realistic shot of QE during a non-crisis period of on hold until at least after October.

The ECB meeting this week, then, absent of any real action, will at least bring along with it a rather dovish slant from Governor Mario Draghi at the post-meeting press conference. The specter of QE will be fleshed out, but without any specific details that would indicate QE is due in the immediate future. A lack of heightened dovishness will probably provoke a short-term squeeze in the Euro, where non-commercials/speculators have increased net-short positions (108K contracts) to their highest levels since the week ended August 21, 2012 (124K contracts). –CV

To receive reports from this analyst, sign up for Christopher’s distribution list.

Related Articles
  1. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  2. Forex Fundamentals

    These Currencies Are The Biggest Losers Of The Stock Downturn

    Here’s a list of the hardest-hit currencies amid the global stock market mayhem.
  3. Forex Strategies

    Will the Euro Continue to Rally? (EUO)

    The euro is rallying. Should investors chase this performance or is the real opportunity on the other side of the trade?
  4. Investing News

    China’s Forex Reserves Dropped Significantly

    China’s forex​ reserves dropped by a record $93.9 billion at the end of August to $3.56 trillion because the Central Bank has been selling dollars to provide a cushion to the falling yuan​
  5. Forex

    The Pros and Cons of a Fully Convertible Rupee

    Amid the rising economic power of India, the talks of making the Indian currency fully convertible are gaining momentum. We look at the pros and cons.
  6. Forex Fundamentals

    Chinese Yuan an Unlikely Reserve Currency

    As the world's second largest economy, China's challenge to America’s dominance includes a push to make the yuan (RMB), the world’s reserve currency. Whether it can do that now is unclear.
  7. Economics

    How Currency Enforcement Helped Sink The Trans-Pacific Partnership (TTP)

    One particular barrier to trade that has received much attention of late and caused delays in negotiations of the TPP is exchange-rate manipulation, by which a country artificially devalues its ...
  8. Forex

    Top U.S Forex News Sites

    Breaking news moves forex markets. Here are the top U.S. sites for tracking forex news.
  9. Investing

    Financial News Comparison: Bloomberg Vs. Reuters (BAC, GOOG)

    Access to financial information has grown with the expansion of digital news. Bloomberg and Thomson Reuters lead the pack, claiming a majority of the business information market.
  10. Economics

    Who Benefits From South Korea's Lowered Interest Rates?

    South Korea is the latest country to cut interest rates in an attempt to stimulate economic growth.
Trading Center