EUR/USD: Germany, Europe’s new sick man?

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The Euro was sailing within relatively narrow margins against the Dollar, above a safeguard, namely the 50-day moving average. Currency traders have just taken note of the very agreed Economic Bulletin of the ECB, of which here is an extract of the conclusions:

“Inflation continues to slow, but is still expected to remain too high for too long. The Governing Council therefore decided, at its meeting on 27 July 2023, to increase the three key interest rates of the ECB by 25 basis points.

Future decisions by the Governing Council will ensure that the key ECB interest rates are set at sufficiently restrictive levels, for as long as necessary, to ensure that inflation returns to its target level as soon as possible. 2% in the medium term. It will maintain a data-driven approach to determining the appropriate degree and duration of this restrictive guidance.”

So much for the language elements. In hollow, we can guess all the balancing act that the ECB will have to lead to both control the trajectory of prices, without weighing too heavily on economic activity. And in particular on the leading economy in the Euro Zone, Germany, which, although naturally still very powerful, is showing signs of greater concern than for France, or even for the countries of southern Europe.

As a reminder at the start of the week, the Sentix index of investor confidence in the Euro Zone certainly rebounded significantly, to -18.9. Yet “Germany is adding fuel to the fire: the leading economy in the eurozone becomes the weakest link in the eurozone, weighs heavily on the monetary union as a whole. The component of the index for for l ‘Germany falls for the fourth consecutive time to -30.7 points,’ reads a commentary note accompanying the Sentix survey. The disappointment was also severe on German industrial production figures in June (-1.5% in volume compared to May).

The economic colossus of the Euro Zone, which entered recession, weakened by the fall in domestic consumption, is therefore weakened. We will carefully follow the next statistical publications on our powerful neighbor. ZEW, inflation, CPI, growth data, industry reports, will be scrutinized.

In the immediate future, go to 2:30 p.m. for the publication of the American CPIs. On the consensus side, prices are expected to rise over one year by 3.3% for the widest product base. Any overshoot of this “target” would mechanically cause tension on the side of the Fed, whose main mission is to avoid a surge in prices, in particular entry into a price/wage loop, a worst-case scenario avoided so far.

The tenor of the inflation figures could indeed give an indication of the US Federal Reserve’s rate intentions. A large proportion of investors (86.5%) are, however, counting on a status quo in September, according to the CME Fed Watch tool. It should be noted that some members of the Fed take an offensive rhetoric, like Michelle Bowman, one of the Fed officials who declared that her members remained “willing to raise the federal funds rate at a future meeting if data indicates that progress on inflation has stalled,” during a speech to the Kansas Bankers Association.

On the agenda this Thursday, to follow in priority the consumer price indices in the United States at 2:30 p.m. We will also follow the volume of weekly registrations for unemployment benefits across the Atlantic, at the same time.

At midday on the foreign exchange market, the Euro was trading against $1,1020 approximately.

KEY GRAPHIC ELEMENTS

The near total retracement of July’s gains does not militate at this stage for a continuation of the advance of the currency pair, without formally ruling it out. This retracement, by its magnitude, weakens the bullish message then delivered over a good part of July. The outcome of the ongoing test of the 50-day moving average (in orange) will be decisive. Immediate neutral opinion. Forex traders will therefore avoid taking a position in the next few hours on the currency pair, waiting for a directional entry.

MEDIUM TERM FORECAST

In view of the key graphic factors that we have mentioned, our opinion is neutral in the medium term on the Euro Dollar (EURUSD).

We will keep this neutral opinion as long as the Euro Dollar (EURUSD) parity prices are positioned between the support at 1.0854 USD and the resistance at 1.1100 USD.

CHART IN DAILY DATA