Analysis | September 9, 2020

KTM FX Weekly: Recovering is losing pace

The price action remained range-bound last week and closed below the 20MA on Sept 07. The EURUSD lost 40 pips or 0.40% at 1.1810. It formed a double top pattern at 1.1870 on the hourly chart.

Quiet trading: The dollar recovered marginally on Monday, the UST 10y yield standstill at 0.72% as it is a Labor Day in the US. Flipside, bunds drifted higher with the Euro equity markets. The forex traders are waiting for the open for the US market to see how the USD responds.

Ahead of the ECB meeting this week, German Industrial Production shows the recovery is losing pace. Will the EURUSD recover after the ECB meeting?

The hot topic yesterday was July German IP, which disappointed at 1.2%mom. However, according to the official release, the other data Sentix index improved for the fifth month in September.

 Bright side: The economic recovery following the Corona-induced slump in the global economy continues at the beginning of September. The sentix economic index for Euroland rises to -8 points for the fifth time in succession. This reading is the best value since February 2020.

“Overall, the current recovery phase is similar to that of 2009, when we also saw a continuous improvement, which, as today, had little impact on stock market expectations. In 2010, investors were positively surprised by the economy. At present, investors doubt that there will be a repeat. Investors still believe that only about 75% of the economic slump will be made up within a year due to the lockdown in March. A second lockdown or similar is not even factored into the price. “we learned from the sentix official release.

 Data review:

  • Italy’s August Manufacturing PMI strengthened to 53.1 vs. July 51.9-highest since June 2018.
  • Germany’s August Manufacturing PMI at 52.2 vs. July 51.0- continued to make up for lost ground.
  • EZ Manufacturing PMI posts 51.7 in August vs. July 51.8. The latest data signals another modest recovery in the region’s good-producing sector, according to IHS Markit.
  • However, French Manufacturing PMI lost some momentum in August, with the PMI dipping to 49.8 vs. 52.4 July. It signals a fractional decline in operation conditions, according to the IHS Markit.
  • EZ services PMI showed that the economy lost momentum in August with the Composite output index fell to 51.9 vs. 54.9 in July.

 Data preview: Europe will generate headlines with the ECB meeting. All eyes will be watching the European Central bank to see the communication tone of the “inflation.” We will also see EZ Q3 Final GDP today.

The Fed highlighted, “The FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it “seeks to achieve inflation that averages 2 percent over time”. At the virtual Jackson Hole Symposium, Powell has signaled a significant shift in its approach to managing inflation. Now the Fed targets an average of 2% inflation, rather than making a 2% target. This means lower rates will stay longer. The Fed hasn’t been able to reach the 2% target point for the last ten years.

Following Powell’s testimony at the Kansas City Fed’s Economic Policy Forum on August 27-28, the initial reaction was negative, but the rising yields changed the scenario. Rising yields are providing support to the US dollar in the near term. How long it will last is the key concern. The improving risk sentiment supports the AUD and EUR against the dollar.

Coming back to our subject ECB meeting, will the EURUSD resumes the uptrend post the ECB meeting? Well, we are neutral on a weekly trading basis. However, we remain bullish for 1.2500 and 1.3100 in the long term.

The market participants and we do not expect any new policy signals in this week’s ECB meeting. We continue to focus on the inflation theme, which could move the bunds and the EUR. A downward revision to the core inflation is the key driver to the EURUSD.

ING: The stand-out of the week ahead will be Thursday’s ECB meeting. No doubt, the strong EUR will be a hot topic as will the issue of the Fed’s change in monetary policy strategy. On the former, we’ve have started to see some soft verbal intervention against EUR strength, and the focus at the meeting will be: i) how much lower does the ECB revise its 2022 inflation forecast (now 1.3%) and ii) will it start dropping hints about future easing?

Nordea: The ECB is under pressure to prevent further strengthening of the EUR with core inflation already at record-lows. We expect Lagarde to bring promises of more policy easing to next week’s ECB meeting, if not concrete easing measures.

Danske Bank: The ECB meeting on Thursday next week (which also carries new staff projections) is set to be relatively uneventful for markets as the ECB still needs further data to assess the economic and inflation impact from COVID-19.

TECHNICAL OVERVIEW

A stronger EU leads to More stimulus. More stimulus eventually pushes a higher EUR. 

The Euro is consolidating between 1.2000-1.1750 ahead of this week’s ECB meeting. Previous swing low finds at 1.2040 and 200EA (Weekly) located at 1.2100. Unless the Euro settle above the resistance zone, we could not rule out more consolidation before printing the five-wave 5.

The formation of the lower low of 1.1690 is still valid. A move below this level could truncate the rally. 1.1750 and 1.1690 are immediate supports for the next few trading sessions.

 It is important to always keep in mind the risks involved in trading with leveraged instruments.

What is your Technical View?

Do you have a different idea? Please leave us a comment and get an answer from our professional analysts

Latest Article
Improve your trading with a True ECN Broker
Trading account overview