INTENDED USE: Analysis data that can be studied to aid your Euro trade planning.
DERBYSHIRE GB / AUGUST 21st, 2023 - Updated following the CPI report. Next update is planned for after the PMI data on Wednesday, August 23rd or before if any significant event occurs.
Macroeconomic Snapshot
European Central Bank (ECB) Governing Council:
The July meeting matched expectations with a 0.25% hike of the Main Refinancing Operations rate setting it at 4.25% which is up from 4.00% and the 0.25% hike in May. The next meeting is due on Thursday, September 14th.
The EA interest rate is anticipated to be raised again although the peak is near which is likely to lead to stabilised bund yields which may dissuade investors and limit upward support on the value of the Euro
Gross Domestic Product Growth Rate: Second Q2 ‘23 estimate matched expectations coming in at 0.3% expansion and up from 0.0% contraction in Q1 ‘23 which was revised up from -0.1%. The third estimate Q2 report is due on Thursday, September 7th.
EA GDP is anticipated to improve this year which may increase investor confidence in EA stocks which may limit downward pressure on the value of the euro.
Consumer Price Index: July final estimate matched expectations coming in at 5.3% inflation and slightly down from 5.5% in June. The flash August report is published on Thursday, August 31st.
EA CPI is anticipated to improve a little further this year but to remain high although with the peak now past, investor confidence in EA stocks is likely to improve which may limit downward pressure on the value of the euro.
Labour: June ‘23 report slightly beat expectations coming in at 6.4% which is the same as April ‘23 which has been revised down from 6.5%. The July report is due on Thursday, August 31st.
EA unemployment is anticipated to remain steady this year which may stabilise investor confidence in EA stocks which is likely to limit downward pressure on the value of the euro.
Russian Gas Dispute: The Russia-EU gas dispute caused an increase in the cost of energy which has reduced the spending power of consumers and resulted in slower economic growth.
This price pressure has since significantly eased and is expected to lead to increased foreign investment in the stock market and upward support on the Euro’s value.
Russian Invasion of Ukraine: The war is having a detrimental effect on the global and EA economy by causing higher energy prices, supply chain disruptions, financial market volatility, refugee crisis and geopolitical uncertainty.
The war will at times cause risk aversion and may lead to decreased foreign investment in the stock market and downward pressure on the Euro’s value.
EUR/USD (Previous Three Months)
The EUR/USD is currently taking pause from its retracement of the uptrend that was looking to test the 100.00% level near 1.082 and a move below would break the uptrend. The recent moves can be explained as follows:
July 6th Start of Uptrend: The EUR/USD has been in an uptrend since the start of July as the Euro was bought as expectations rose that the ECB would raise higher than previously thought.
July 18th Retracement: USD strengthened as speculation mounted that the Fed would hike further than expected.
July 26th Uptrend Resumes: USD strengthened as the Fed hiked and didn’t commit to further hikes.
July 27th Retracement: EUR weakened as the ECB hiked and didn’t commit to a pause.
August 10th Retracement: USD weakened as US CPI came in slightly lower than expected.
EUR/USD Outlook
Upcoming and Recent Events:
Thursday, August 10th
US CPI y/y climbed to 3.2% vs 3.3% exp
Wednesday, August 16th
FOMC Meeting Minutes Fed Leaves Door Open to Further Tightening
Thursday, August 17th
US Unemployment Claims fell a little more than expected to 239K from 248K prev.
Friday, August 18th
EU Final CPI y/y fell to 5.3% vs 5.3% exp. from 5.5% prev.
Wednesday, August 23rd
EU Flash Manufacturing PMI 42.7 prev.
EU Flash Services PMI 50.9 prev.
US Flash Manufacturing PMI 49.0 prev.
US Flash Services PMI 52.3 prev.
Thursday, August 24th
Day 1 of the Jackson Hole Symposium
US Unemployment Claims
Friday, August 25th
Day 2 of the Jackson Hole Symposium
Intermarket Assessment
CME Group 30-Day Fed Fund futures
September: falling sentiment of a hold, 85% in favour (from 90%), 15% for a 0.25 hike (from 10%)
November: falling sentiment of a hold, 57% in favour (from 61%), 37% for a 0.25 hike (from 35%)
Six Month Bond Yields
Bund: rising to 3.55% from 3.52% last week
Treasuries: Steady at 5.51% from a peak of 5.51% the previous week
Stock Market
S&P500: Slightly bearish holding above 100 and 200 day moving averages after falling below 50 day moving average last week
DAX: Bearish holding above 200 day moving averages after falling below 100 and 50 day moving averages earlier in the month
EUR/USD Analysis
Value of the EUR/USD to remain above 1.08: The previous three month moves have created an uptrend climbing from 1.08 area to 1.12 area although it has almost fully retraced to test the 1.08 area again. The macroeconomic situation suggests the uptrend is likely to hold.
Shorter Term Value of the EUR/USD to remain above 1.082 unless the EU PMI data due on Wednesday significantly disappoints: The previous three week moves have been slowly falling from 1.115 to 1.086 on the back of a weaker euro as the ECB won’t commit to another hike. The base case for events this week are favoured towards a slightly weaker euro, however an unexpectedly low PMI reading could signal that the ECB need to pause again and cause significant euro weakness over the short term.
Gavin Pearson
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Specialises in forex G7 currencies
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