Market News & Insights
27 April 2018

Boom To Gloom As Euro Almost Completes 2018 Round Trip.

It would appear the euro has well and truly broken down and with data continuing to decline the question is, how far can the single currency retrace? The big event of the day was the ECB, as expected there was no change in policy in the initial announcement and the official statement at the press conference was like a copy and paste from last month’s statement. The major taglines remained the same. Rate would remain unchanged until well after any bond purchases have ended. Bond buying would continue until the ECB see some sustained inflation adjustment but Draghi & co remain confident inflation will converge towards goal. In terms of the general economy, as we discussed yesterday the ECB see recent sluggishness as a moderating of expansion and normalisation from record ten year growth. That all sounds great and positive with the euro trading higher for much of Draghi’s speech and even after into question time however Draghi announced the ECB would react to any unwarranted tightening, later acknowledging a loss of momentum in some Eurozone countries. Once Draghi finished talking the slide in the euro recommenced, EURUSD is now down over 2.85% in a week, and 1.2% from yesterday’s highs.

French GDP data this morning was considerably weaker, posting 2.1% annualised through Q1, down from 2.6% previously and short of the 2.3% expected. There are several ECB speakers due across the wires this morning but I can’t see them shifting the negative sentiment currently pressing the euro lower, while consumer confidence is also due across the wires and given the general weakness in this area is unlikely to offer much support. We spoke earlier in the week about a key technical break in the EURUSD trend, a break below the rising trend support channel that has been in place for over a year. That in itself was a signal the upwards trend was over, but we had to hold on until the major event risk was out of the way before continuing lower. The ECB certainly didn’t offer up any hawkish sounding and that let the selloff in the euro continue and now we’re looking back down towards the psychological 1.2000/05 area for next support, while 2018 lows towards 1.1920 mark next major support for me. Any rally higher should run out of steam as EURUSD approached 1.2200.

UK GDP crosses the wires this morning and headlines the morning calendar, Q1 data is expected to show GDP slow to .3% from .4% but given weather effects and broadly weaker PMI a miss to the low side would not be unexpected. Especially considering the BOE’s warnings of the market for rate hikes. Perhaps he knows something we don’t but it was enough to start selling in GBP and it will be the same today should GDP show signs of weakness. EURGBP is holding just below .8700 after breaking several key support areas but additional downside halted above .8780. that provides support for now while rallies up towards .8730 and after that .8750 will find some sellers. Carney is also due to speak again this afternoon and at this stage who knows what he’ll be saying, his reputation as the “unreliable boyfriend” continues to grow, a title he’s found hard to shake following the accusation of scaremongering around Brexit risks.

The USD has been soaring towards 15 week highs with the USD index closing in on its January 2nd opening levels. This runs into a confluence of resistance and may well see the greenback’s advance stall unless GDP figures can provide additional support. Markets will also have a very close eye on the PCE Core reading which is set to rise to 2.6% from 1.9% and that is the Fed’s favoured benchmark for inflation. The downside is GDP is set to slow to 2%, but again that’s not an unexpected outcome so the USD should only be concerned with anything weaker than that. GBPUSD has dropped sub 1.3900 and to be honest there’s not much in the way of support until we get down towards 1.3800.