EUR/USD: buying looks risky
European statistics could not please the bulls of the euro/dollar pair on Tuesday with positive figures. Many of the advantages of the day’s releases were crossed out by data on the growth of European GDP – this indicator in quarterly terms slowed to 0.3%, in annual terms – to 2.1% (experts expected growth to 0.4% and 2.2% respectively). However, this circumstance did not prevent the bulls of the EUR/USD from maintaining optimism, and the pair was able to test the 17th figure.
Undoubtedly, the disappointing data on the growth of the European economy restrained the upward momentum of the pair. But traders still focused on the positive dynamics of inflation in the eurozone. The consumer price index is growing for the third month in a row, and in July was able to reach a six – year high – 2.1%, although the overall forecast was somewhat more modest-2%.
Core inflation also rehabilitated itself: let me remind you that the June figure was revised downward (to 0.9%), but this month the indicator was better than expectations – 1.1%. Traditionally, the data on the labor market also pleased – in Europe as a whole, the unemployment rate slightly fell down (to 8.3%), in Germany, this indicator remained at a record low of 5.2% (although the number of unemployed fell by a smaller amount, than it was expected earlier).
This dynamic of key macroeconomic indicators means that the European Central Bank will continue to follow its policy of normalizing monetary policy: QE will be finally curtailed in December, and next year (most likely in the second half of the year), the regulator will raise the interest rate. This is provided that the current trend will continue-at least in the most minimal manifestations.
The structure of the CPI shows that the highest growth in inflation was recorded in the energy sector (by 9.4 %, compared with 8% in June), which in turn suggests that if the oil market will hold on to current positions, European inflation will have a “reliable rear”. Here it is worth recalling that oil is gradually recovering, trading in the level of 75 dollars. In August, when US sanctions against Iran take effect, this trend may continue, positively affecting the dynamics of European inflation.
Among all the data published on Tuesday, the most alarming is the volume of the euro area’s GDP. On the one hand, the problem is systemic – in the second quarter, none of the member countries of the Alliance was able to cross the 0.6% mark, while in the first quarter, some of them showed stronger dynamics. Let me remind you that the European Commission reduced its economic growth forecast this spring due to “external risk factors”.
This, of course, is about Trump’s protectionism, which at that time actively threatened Europe with the introduction of new import duties on European cars. According to experts, the “heat of passion” in the relations between the US and the EU in the first quarter of this year contributed to the fact that manufacturers began to reduce their exports. At the moment, Washington and Brussels have concluded a “trade truce”, and the relevant working groups have begun to develop a mechanism for mutually beneficial trade.
Therefore, despite the relatively weak GDP figures for the second quarter, it is too early to talk about a large-scale decline. Moreover, domestic demand continues to grow, as evidenced by strong data on inflation and consumer activity. Such mutually exclusive trends are not typical for the period of stagnation, so in the third quarter the European economy can “catch up”, especially if the deal between the US and the European Union is still concluded. By the way, the experts of the European Commission in their forecasts also noted that in the second half of the year, economic growth in the EU will accelerate against the background of lower unemployment, growth in consumer activity and a decrease in household debt.
In other words, the market did not attach much importance to the slowdown of the European economy, and this position is largely justified. In the context of recent events, inflation was much more significant for the euro, which showed a good result.
But all this does not mean that now it is necessary to open long positions on the EUR/USD pair – the loss is too great.
After all, do not forget that the next meeting of the Fed will be held on Wednesday, where the regulator will assess the current trends. Despite the slowdown in the consumer price index (on a monthly basis) and the basic index of personal consumption expenditure, the Fed can inspire the dollar bulls with a “hawkish” attitude. Jerome Powell will not hold a press conference at this time, so traders will have to draw appropriate conclusions only from the text of the accompanying statement.
The Federal Reserve can repeat the main features of Powell’s position, voiced by him in the US Congress. Then he completely ignored the growth of unemployment and weak figures on average wages, saying that the Federal reserve will continue to tighten monetary policy. If the Fed also neutralizes the fears of dollar bulls on Wednesday, the greenback will return the EUR/USD pair to the base of the 16th figure. The possibility of such a scenario cannot be ruled out, and not only because of fundamental factors. Technically, the pair did not overcome the upper line of the Bollinger Bands on the daily chart (1.1760), so the price rollback to the July low is quite likely.