EUR/USD Needs to Get Much Higher to Confirm a Bull Trend
Image © Pound Sterling Live
The Euro-to-Dollar exchange rate still has a lot further to climb before generating more “upside interest”, say strategists at Commerzbank.
A daily close above the August 26 high at 1.1164 high would be required to "confirm a bottoming formation was in place," says Rudolph Axel, chief technical analyst at the bank.
Such a move would then bring a target at 1.1268 back on the radar.
Yet even a move that high may not be enough to get bulls excited.
“The cross will need to regain the 55 week ma and downtrend channel resistance line at 1.1329/46 to generate upside interest,” says Rudolph.
Part of the problem is that in the past the pair has been in a strong downtrend for a long time - ever since the beginning of 2018 - and downtrends usually require a major shift in the fundamental outlook to reverse.
Meanwhile, the Head of FX research for HSBC, David Bloom, has said, "the Dollar is the place to be," because “It still gives you the highest yield over 1 year, it is still the risk currency, it is still the lifeblood of currency markets.”
He also said the Dollar was preferable to the competition, adding, “you certainly don’t want the Euro, and why do you want to mess around with Sterling.”
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The Euro fell from recent highs against major rivals after data from Germany confirmed a trend of deteriorating growth remains intact, which will only add to expectations the European Central Bank will this month announce a series of measures to underpin the floundering Eurozone economy which could in turn work to keep a lid on any excesses in the single-currency.
German industrial production fell by 0.6% in July, according to Destatis figures released Friday, when markets had been looking for a 0.4% increase to draw a line under the previous month's -1.5% contraction. The disappointment means the industrial sector got off to a torrid start in a quarter where the German economy must grow in order for it to avoid a so-called 'technical recession' that is defined as two consecutive quarters of contraction.
"A much worse headline for industrial output than we had expected, even with the upward revision to the June numbers," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics. "The July industrial production headline combined with the dreadful retail sales number now send a convincing signal that the German economy is in recession. The August and September numbers could still spring upside surprises, but we don’t have high hopes."
Above: Pantheon Macroeconomics graph of manufacturing orders (PMI) correlation with output.
Germany's economy, the growth engine of the Eurozone if not the European continent, has gone into a tailspin in 2019 due to an ongoing downturn in the manufacturing sector. German industry does a large trade with China and its car firms bet big on the Chinese market for luxury vehicles in recent years due to the country's burgeoning middle class, but all of that has changed with the outbreak and each escalation of the trade war with the U.S.
China's economy has struggled as a result of the trade war and officials have felt compelled to provide monetary and fiscal stimulus to it on multiple occasions in the last year, although that's not stopped demand for German manufactured goods from ebbing. That saw the economy contract by 0.2% in the second quarter and many are now increasingly attuned to the threat of a recession.
The numbers will only add pressures on the ECB to announce a 'shock and awe' set of measures at their September meeting, designed to stimulate economic growth and boost inflation.
"With euro area growth and inflation remaining depressed, Mario Draghi is likely to announce a significant easing package when the ECB Governing Council meets next week. Loose monetary and financial conditions should keep the risk of a region-wide recession low. But the economy is unlikely to rebound meaningfully as long as governments shy away from boosting spending," says Karsten Junius, chief economist at J.Safra Sarasin, a Swiss private bank.
Above: J Safra Sarasin Eurozone growth estimate (left) and subjective recession probability.
The Euro tends to underperform and trade below 'fair value' levels at times of ECB stimulus, as the policies incentivise the export of cheap-to-borrow Euros out of the Eurozone, while providing little attraction for foreign investors to pump their capital into Eurozone money assets owing to the poor returns on offer. Quantitative easing - also known as the asset purchase programme - meanwhile increases the supply of Euros into the economy, thereby diluting unit value.
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