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MARKETS: EU inflation slows to lowest level since 2009

01 August, 2014

By Jameel Ahmad, Chief Market Analyst at FXTM

The overall weak EU sentiment continued on Thursday with the major news being that in July, EU CPI unexpectedly slowed to its lowest level in nearly five years. Usually, such a headline would encourage the EURUSD to encounter a sudden rush of downside pressure. However, with the ECB appearing prepared to offer recently implemented stimulus measures time before considering the possibility of introducing QE, this protected the pair from suffering high losses. The EURUSD concluded trading at 1.3389

Today, we await finalized manufacturing PMIs throughout the Eurozone. It was already confirmed last week that the EU Manufacturing PMI data was slightly higher than expected in July and this awareness might lead to a muted response to the release.

The US Non-Farm Payroll release this afternoon should be considered as the major event risk for EURUSD. Wednesday’s ADP employment report suggested that the United States added around 220,000 jobs to their payroll in July, which is significantly lower than June’s 288,000. Investors will be interested in discovering whether the US Unemployment Rate decreased in July. The Federal Reserve has previously mentioned a 6% unemployment target and if this materializes today, this is where the EURUSD will experience bearish pressure. Confirmation of a declining US unemployment rate will continue to improve confidence in the US economic recovery and inspire further selling in the EURUSD. Support levels can be found at the current yearly low, 1.3366 and 1.3322.

Confirmation that UK Nationwide House Prices appreciated by around an annualised 10% encouraged downside movement in the GBPUSD. Bank of England (BoE) Governor, Mark Carney had previously said that the UK housing sector posed one of the largest threats to the UK economy. The GBPUSD declined by up to 50 pips following the release, before concluding trading at 1.6884.

The latest UK Markit Manufacturing PMI data is announced today and a senior UK economist at RBS suggested over the weekend that the Manufacturing PMI will be registered at 58, a yearly high. Previously, the BoE have pinpointed the UK manufacturing sector as a potential target for UK job growth and if the UK Manufacturing PMIs are confirmed at a yearly high, we can expect the GBP bulls to attempt a rally. Possible GBPUSD resistance can be found at 1.6919 and 1.6942. From here, any fluctuation in the GBPUSD will be dependent on how the markets react to the US employment report.

It was confirmed on Thursday that over the past month, US Initial Jobless Claims dropped to an eight-year low. This encouraged the USDJPY to record 10 days of consecutive gains, surpassing an achievement last seen in March 2005. The USDJPY concluded the day’s trading at 102.786.

Where this pair fluctuates today will be largely dependent on how the financial markets react to the US employment report. Possible USDJPY resistance can be found at 102.781 and 103.075. However after recording such a long run of successive gains, investors might start looking to take profit on the pair sometime soon. If the markets react unfavorably to the US NFP release, this will provide an opportunity for a pullback in the USDJPY. Potential support levels can be found located at 102.603 and 102.477.

Despite China’s Manufacturing PMI showing that China’s factory activity expanded at its fastest pace in more than two years, further profit taking was evident in the AUDUSD. The previous day’s Australian Building Approvals release showed a monthly 5% contraction and bearing in mind the Australian economy is under pressure to transition towards domestic consumption, this has weighed on investors minds. The AUDUSD declined by around 60 pips throughout yesterday, before concluding trading at 0.9293.

Finally, there were some signs of intense selling cooling down in the NZDUSD yesterday. After Reserve Bank of New Zealand (RBNZ) Governor, Graeme Wheeler’s comments last week that the New Zealand Dollar valuation was both unjustifiable and unsustainable, the NZDUSD has since declined by around 200 pips. The pair concluded yesterday’s trading at 0.8497.

The RBNZ Governor also announced that the New Zealand Central Bank were set to pause monetary tightening (raising interest rates) and this will likely continue to encourage investors to take profit on the Kiwi. The RBNZ became the first major Central Bank to raise interest rates since the global financial crisis emerged and a pause in tightening should lead to the NZDUSD depreciating back to pre-interest hike levels. 


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