Euro / Dollar Rate's IFO-Inspired Rally Fades, EUR/USD Back Below 1.10

EUR/USD trades with a negative bias with the strong German IFO survey only momentarily assisting the pair back above 1.10.

The Euro-Dollar exchange rate remain biased for a continued move lower with strong Eurozone data unable to halt the decline.

Technical studies conducted by strategists at Lloyds Bank in London suggest a breakdown through support at 1.0910 would confirm the sideways process of the last few weeks has been a consolidation ahead of a decline to lower support levels in the 1.08-1.0750 region.

However, "a rally back through the 200dma and pivot resistance in the 1.1050/80 area would suggest we are still in the current range process," say Lloyds.

A move through 1.1175/95 is needed to re-expose the 1.1420/30 broader range highs.

"Longer term we are becoming wary that 1.0450-1.17 range is developing as a “flag” consolidation ahead of a test of key longterm support in the 1.00-0.99 region. We are monitoring this for greater clarity and confidence in this view," say Lloyds.

EUR/USD Outlook Dominated by US Fed

The meeting of the Federal Reserve's Open Market Committee (FOMC) on Wednesday Jul 27 is arguably the most significant event for the pair in the week ahead.

It is probable that we will get a more upbeat, posiitve message from the Federal Reserve (Fed), probably paving the way for a reinstatement of expectations for a 2016 rate hike.

Financial markets have settled down now following the short-lived volatility which followed Brexit, and June Payrolls came out better-than-expected rising back above 200k, and dispelling fears of an imminent recession.

Morgan Stanley see a 50% probability of a rate hike by the end of the year.

“Our economists expect next week's Fed meeting to be ambiguous, keeping options open. Market pricing of the probability of a Fed hike this year has moved up to 50%, a level with which the Fed is likely comfortable. We comfortable. We believe risk-reward going into the Fed meeting is fairly balanced, leaving us comfortable holding USD shorts through the meeting.”

EUR/USD Chart Signalling More Downside

The EUR/USD pair has continued declining after breaking below the lower border-line of a multi-month rising channel.

It is expected to continue selling off until it has reached the target for the channel breakout, at around 1.0750, which is calculated from extrapolating the height of the channel down, from the point of the break.

A strong support level at 1.0861, however, provides an interim target, where the exchange rate will almost certainly pause or possibly even bounce.

The MACD momentum indicator in the bottom pane has crossed its signal line, supporting the bearish outlook.

A break below the 1.0909 Brexit spike lows would provide added confirmation of further downside for the pair.   

IFO Data Unable to Spark a Recovery

The euro rose one tenth of a cent against the dollar on Monday morning after a highly regarded German sentiment survey showed German business people remained obstinately hopeful despite the 'bombshell'  of the UK voting to leave the European Union.  

The IFO sentiment survey in July fell from 108.7 to 108.3 -  but not as much as the 107.5 analysts had expected.

Sentiment amongst Manufacturers was particularly hit by the imapct of Brexit, said IFO institute director Dr Clemens Furst:

"Manufacturers, however, are markedly less optimistic about the months ahead. The automotive branch even reported pessimistic business expectations."

In Wholesaling sentiment fell, but in Retail and Construction sentiment rose or hit new highs, although views of the current situation declined a little.

Overall the business conditions were summed up as revealing a "resilient" German economy.

Eurozone Inflation Data Lies Ahead

Eurozone inflation data for July, is the most important release for euro in the week ahead, and this will be published on Friday 29th.

It is expected to come out at 0.1% - the same as June.

July Manufacturing and Services PMI’s, showed the Eurozone economy coping quite well after the shock of Brexit, but the July CPI data will be another useful gauge of how the UK’s exit from the EU has impacted on the Eurozone economy.

The inflation data will also influence central bank policy and whether the ECB decides to press the button on further stimulus in September.

The ECB’s July meeting on Thursday suggested a change of stance to a more ‘wait-and-see’ approach in regards to more stimulus; this was viewed as a shift to a more neutral stance by analysts, many of whom had seen a high probability of easing in the autumn.

The results from the European Banking Authority’s (EBA’s) EU-wide bank stress tests will be published on Friday.

Whilst the majority of banks are expected to pass the tests, there are some in certain countries, which may struggle.

Italian banks have struggled to keep their capital ratios in line with regulator’s guidelines as a result of a mixture of Brexit impact on bank stock prices and thehigh number of Non-performing loans weighing on their profitability.

Nordea Bank’s Tuuli Koivu, comments that:

“At the aggregate level, we do not expect the results to bring surprises given the generally rising trend in banks’ level of capital. However, continuously weak economic development has raised risks in some countries as banks are suffering from non-performing loans and low profitability which has complicated banks’ efforts to improve the capital ratios. Thus, it is likely that the stress tests find a need for improvement at least in few banks.”

US Data to be Aware of

Data in the previous week showed the housing sector in fine fettle.

Building Permits rose by 1.5%, Existing Homes Sales also rose more than expected, but the Philadelphia Fed Manufacturing Index declined to -2.9 from 4.9 previously when 5.0 had been expected.

Nevertheless, due to global risk trends moderating, markets seem to be starting to change their expectations about when the Fed will next raise interest rates.

Following Brexit markets were not pricing in a rate rise until 2018; however, now there appears to be a 50/50 chance of a hike in 2016.  

The preliminary second quarter GDP data on Friday is the other main release of the week as markets have been eagerly anticipating how Q2 growth will look ever since Q1’s figures came out so badly.

Investors are asking themselves, will Q2 will be was it as bad as Q1?

June Durable Goods orders are scheduled for Wednesday morning, but unlikely to impact rates much, since markets will probably be moribund going into the Fed rate meeting.

Out on the same day is Pending Home Sales.

On Tuesday Consumer Confidence in July will be published, which is forecast to fall to 95.5.

New Home Sales is also released then, and is forecast to rise to 560k.