Fundamental Analysis: Data and the ECB Sink the Euro

Fundamental Analysis: Data and the ECB Sink the Euro

The euro has declined sharply this week in many of its pairs to reach fresh two-year lows in some cases. The immediate reasons for the common currency’s fall are surprisingly poor data this week and more negativity in the European Central Bank (ECB)’s latest bulletin.

Euro-dollar has moved below $1.113 this afternoon GMT, the lowest since mid-June 2017. EURJPY also fell this week to around ¥124.55. Losses were smaller against the pound and the Australian dollar, though, with the euro now at about 86.5 pence and A$1.59.

More warnings about growth

This morning’s release of the ECB’s latest economic bulletin was negative for the euro. The document confirmed estimates of lower economic growth at the central bank’s last meeting. Risks, it asserts, remain to the downside for the eurozone’s economy. However, the bulletin stressed that domestic issues are less important than ‘global headwinds’.

Before today, German data was the catalyst for the euro’s latest bout of losses. Yesterday’s Ifo Business Climate in particular was unexpectedly low at 99.2. Although this release is not much worse than the previous 99.9, it missed both this figure and the consensus of 99.6. More negativity in the eurozone’s largest economy is a strong headwind for the euro, especially since the weaker overall picture has now persisted for some time.

Demand for selling the euro to fund carry trades is one of the main factors causing such a sharp decline after these releases. Euro-dollar’s current differential in rates is unlikely to change from 2.25-2.5% against the euro until at least 2020.

Conversely, the performance of EURAUD this week has been very different. The Aussie dollar suffered a dramatic fall yesterday morning after data at 01.30 GMT. Australia’s annual consumer price index is down to 1.3% growth, with the quarterly release at 0%. These are some of the weakest figures since 2016. They might raise again the possibility of the Reserve Bank of Australia cutting rates this year.

Attention turns to paired currencies tomorrow

There are no more releases of important data from the eurozone this week. This means that traders will probably focus more on news affecting the other currencies of pairs with the euro. Coming up shortly is data on orders of American durable goods: this figure is very unlikely to alter the fundamental outlook significantly unless there’s a big surprise.

However, tomorrow’s preliminary GDP data from the USA is centrally important for EURUSD and possibly other pairs with the euro as well. The prediction for quarterly GDP growth is 2.2%. A higher figure could drive an extension of EURUSD’s losses.

Looking further ahead, some of the most important statistics from the euro are next week. Chinese manufacturing PMI on Tuesday might give more clues as to how severe the ECB’s ‘global headwinds’ could be. German job data and eurozone GDP the same day are also significant releases for the common currency’s performance.

Further small losses in view for the euro

Overall, the fundamental outlook for the euro is very negative compared with most major currencies. As usual, though, traders should be careful not to ignore technicals. A move by the euro into oversold territory could well trigger a bounce, especially if American data misses expectations. In general, a further slight decline for the euro in most pairs is favorable.

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