Euro Bats Away Weak German Data as Traders Eye Thursday's ECB Meeting

Mounting expectations that the ECB will be ineffective in its effort to prevent further gains for the Euro cast economic numbers into the shade Wednesday.

The Euro shrugged off weaker than expected industrial data from Germany Wednesday morning, rising during early trading, as speculators continue to bet the European Central Bank (ECB) will lay the foundations for a tapering of its quantitative easing programme at its policy event due on Thursday.

German factory orders growth surprised on the downside Wednesday, falling by -0.7% for the month of July, when economists had been expecting an increase of around 0.2%.

This weak data should raise some eyebrows - is the stronger Euro finally having a negative impact on economic activity?

Breaking down the number, German factory order books were hit by a 1.6% fall in domestic work and choppy demand from overseas as foreign orders from the Eurozone slid by 1%, offsetting non-Eurozone growth of around 0.6%.

The Euro-to-Pound exchange rate rose by 0.11% early in the London session, for bids and offers to be accepted around the 0.9154 level, implying a Pound-to-Euro rate of 1.0925. The Euro-to-US-Dollar rate gained 0.11% to 1.1931.

As we note here, technical considerations appear to be in charge of the market at present with data looking to be taking a backseat to the charts. This is probably a good thing for those hoping for a stronger Euro as recent data has come off the boil somewhast.

Germany’s factory data was accompanied by the monthly retail PMI survey for the Eurozone, which showed sentiment among retailers taking a step downward in August.

“The latest data pointed to a further month of underperformance by eurozone retailers, with actual sales falling short of targets. The degree of the shortfall, moreover, widened since July and remained marked overall. The largest gap between forecast and actual sales was recorded in France, followed by Germany and then Italy,” says IHS Markit, the survey compiler, in its accompanying statement.

The retail PMI is notable in the context of July retail sales, details of which were released Tuesday, which fell further than expected. Spending on Eurozone high streets slid by 0.3% in July when economists had expected a more modest 0.2% decline.

Apart from placing a question mark over the likely strength of consumer spending going into the third quarter, when taken together with the fall in Eurozone services PMIs for August, recent data gives the ECB plenty of additional fodder it can use to jawbone the Euro lower on Thursday.

Euro Bulls not Scared of the ECB

“There is a growing suspicion that President Draghi will struggle to talk it lower – especially with USD headwinds growing. EUR/USD could drift up to 1.1980/2000,” says Chris Turner, head of foreign exchange strategy at ING Group.

Euro bulls have so far been undeterred by the week’s data, instead focusing on the prospect of the ECB soon paring back its bond buying program, which would mark a beginning of the end for the era of ultra-loose monetary policy in the currency bloc.

The Euro-to-Pound and Euro-to-US-Dollar exchange rates have appreciated by 8% and 13% respectively during the year to date, driven as much by political noise around the UK and the US as they have been a firming recovery in the Euro area.

“Fairly strong economics data across the globe stand in contrast to the bullish and dovish feel to the bond markets. Should the ECB continue draghing out its taper, against the advice of our economists, that could help bond longs,” says Michala Marcussen, chief economist at Societe Generale.

The Euro’s gains have led to a solidifying consensus among strategists that the ECB will attempt to force the exchange rate lower at Thursday’s meeting. Although many doubt the effort will be successful over the medium term and questions still exist over the likely timing of its tapering effort.

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