Market News & Insights
28 August 2014

The Euro Eyes German Inflation For Clues

EUR/USD 1.3207
GBP/USD 1.6596
GBP/EUR 1.2564 (0.7960)
EUR/CHF 1.2062
GBP/CHF 1.5155
GBP/AUD 1.7733

The lack of any major data or headline news through yesterday’s session saw markets remain in consolidation through much of the day. In Europe equity markets were little changed following the strongest two day advance in four months, while the EUR rallied off recent lows on a Reuters report the ECB would not look to ease at next week’s policy meeting. In the US equity markets were also little changed as investors saw little reason to push the recent advance in equities any higher, especially ahead of key data today. Overnight the USD lost ground against most G10 currencies, there was a notable advance in AUD against the greenback, while USDJPY has failed to hold on moves above 104.00

Today is a more active day on the economic release calendar with a packed schedule from both European and US data. European markets will be looking towards Germany initially with the release of German unemployment data and an afternoon release of the preliminary CPI inflation figures for August. German unemployment is expected to remain unchanged at 6.7% while baseline year on year inflation is expected to remain unchanged at a four year low of .8%. The inflation outlook for the Eurozone is key to ECB policy, tomorrow provides the regions CPI release so today’s German print can give us a preview, and allow markets to shape expectations.

German price growth data has tended to be slightly to the upside and any potential release following this trend could well send EUR pairs higher. Expectations for the ECB to increases stimulus have been high since Draghi spoke in Jackson Hole, yesterday a report released by Reuters citing ECB sources suggested there would be no easing at next week’s policy meeting, a better inflation outlook would support this view further and provides the EUR with some potential to rally. Needless to say, should the inflation situation deteriorate, either in Germany or across the region tomorrow, we would expect to see further declines for the single currency.

As mentioned above, the USD underperformed in overnight trade following treasury yields lower, losing ground against most G10 currencies ahead of key data releases today, and following strong advances. The overnight decline in USD however was only small and could well just reflect traders taking profits on the recent move higher ahead of today’s key data. With that, most focus today will be on the second estimate of US Q2 GDP. The initial report of 4% growth through Q2 was the key catalyst for the recent dollar bull run, today’s release is expected to see that revised down to 3.9%. The risk to the USD is a softer print, anything to the downside will undermine recent expectations the Fed will look to raise rates sooner than expected.

There are also several other releases from the US session which will still take some trader attention, weekly jobless claims and pending home sales are both due for release. The bigger picture remains however and all releases will be looked at as to how they will impact Fed policy and the path to interest rates increases.

Once again UK data releases remain light on today’s calendar. EURGBP has come under selling pressure with the pair breaking back below the key .8000 level this week, and breaking back towards support at .7940 yesterday. This level remains key before we open up to a move back towards recent lows, with .8020 holding any moves higher for now.

GBPUSD remains supported at 1.6540 while it tries to break back above the pivotal 1.6000 level. A break and hold above here into the weekend will likely lead us higher towards 1.6700.